Fallon DawgsCertified Financial Planner™, Wealth Advisor, Founder and CEO Harrison Wallace Financial Group
Your 20s are often the most vulnerable time in your life. People in their twenties typically have lower incomes, fewer assets, and may spend more time unemployed or underemployed. Building a degree of economic independence and resilience should be a priority in the coming years. Establishing sound financial habits and real-world financial experiences takes time and failure is expected. As you approach your thirties, it’s time to stop listening to other people’s expectations and make your own plans for your financial future. This in no way means abandoning professional advice. Rather, you can now set your own lifestyle expectations, hold yourself accountable, and learn from the experts about the best ways to reach your goals.
Financial education in schools is over, so your 20s should be the time to educate yourself on all aspects of personal finance and investing. There is no magic number to strive for when it comes to your 401(k) or 30 net worth. Average 401(k) balance Those aged 25 to 30 spend less than $20,000, with a median of less than $10,000. Establishing and growing your contribution habits with a sound investment plan will have a far greater impact on your 401(k) balance and net worth when you retire than how much money you have in your account at age 30.
Focusing on the wealth-building process instead of obsessing over arbitrary numbers on your 401(k) will help you achieve long-term success and reach your goals faster. Therefore, the milestones reached by age 30 should emphasize learning and process. By the time you turn 30, try to educate yourself on the following basic elements of investing.
1. Write down your financial plan
The simple step of writing down a financial plan can have a big impact on your financial success.Most people don’t write down a detailed financial plan. Studies show that households with written financial plans Increase monthly savings for retirementBy the time you’re 30, create a plan detailing how you’ll build an emergency fund, pay off debt, save for major purchases like a home, and invest for retirement. need to do it. Don’t obsess over the perfect plan. May change over time. In fact, it’s good practice to revisit your plan every year. Retirement is far away, and given the unpredictable nature of the economy and inflation, as well as lifestyle changes, it’s impossible to predict spending 40 years from now. Setting goals helps you work towards something and gives you the opportunity to improve your plans.
2. Start an emergency fund
Emergency funding is essential to keep the plan on track. Unexpected expenses will occur. While it may be difficult for your 20s to rack up the 6 to 12 months that experts suggest, set up an account for emergency expenses and add to that account on a regular basis. is a simple and important goal to achieve by age 30. .
3. Understand account types and tax laws
By the time you’re 30, you should understand the basic types of accounts you invest in, especially the tax treatment of those accounts. For example, investing for retirement or children’s education usually means investing in deferred or tax-exempt accounts. Some deferred tax accounts are funded with pre-tax contributions and are taxed at the time of withdrawal. Examples include traditional IRAs and 401(k)s. In contrast, Roth IRAs, Roth 401(k), and 529 plans are funded with after-tax contributions, qualified Withdrawals are tax-free. Investing in these tax incentive programs can be a powerful wealth-building tool, but penalties can be a problem if you don’t understand the rules.
On the other hand, an investment in a home down payment is typically made in a taxable (non-qualified) investment account. Such accounts may incur taxes on capital gains and ordinary income. By the time you turn 30, you should have a good understanding of these account types and be able to choose the right one for the right situation.
4. Understand your investment options
By the time you’re 30, you should have a working knowledge of securities such as stocks and bonds, and investment vehicles such as mutual funds and ETFs. As your knowledge grows, you’ll be able to delve deeper into the details of these investments, but a general knowledge of the risks and potential returns of each asset class should help you diversify your investments sufficiently and follow a sound asset allocation strategy. You can start towards
At this stage, it’s perfectly fine to choose and focus on simple, well-diversified investments. Target date funds can simplify investing by offering a single solution with diverse exposures and professional management. However, it is still useful to educate yourself on fund strategies and holdings to improve your investment knowledge. For example, when you turn 30, the retirement period is longer, so most people your age should consider a larger stock position for these assets. Looking at the target date (retirement date) fund allocations, we can see that they are generally heavily allocated to equity funds. As your portfolio grows, you should consider leveraging asset class-specific funds to diversify.
5. Learn the concept of compound interest
Your 401(k) account balance may not be as large as you’d like, and may seem to be growing rapidly at this point in your life and career, but systematically adding And you have plenty of time to profit from compounded returns. Understanding the impact of compounded returns is pure motivation to start an investment program sooner or later. The “waiting cost” is high.
At this age, you have time to adapt and reorient yourself to new opportunities, if necessary. Challenge the experience and don’t get discouraged, often without much financial pain. You are likely still in the early stages of your career path, one of several career paths you may pursue for the rest of your life, giving you time to work towards a higher income. Don’t panic. Even if you’re not where you want to be, there are still plenty of opportunities to change behavior, change careers, overcome mistakes, and seek the support of a financial advisor to guide you through turbulent markets. If you do, you are much more likely to achieve financial independence.
