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Faron Daugs, Certified Financial Planner™, Wealth Advisor, Founder & CEO at Harrison Wallace Financial Group
Your 20’s are often the most financially vulnerable years of your life. People in their 20’s generally earn less, have fewer assets, and may spend more time unemployed or underemployed. Building some financial independence and resiliency should be a priority during these years. Establishing sound financial habits and real-world financial experience takes time, and missteps should be expected. As you approach your 30’s, it’s time to stop heeding the expectations of others and create your own plan for your financial future. This does not mean abandoning expert advice, by any means. Rather, you are now capable of setting your own lifestyle expectations, becoming accountable to yourself, and learning from experts on the best way to achieve your goals.
Because of the death of financial education in school, your 20’s should be a time to educate yourself on all aspects of personal finance and investing. There is no magic number to strive for regarding your 401(k) or net worth at 30. The average 401(k) balance for people 25 to 30 years old is under $20,000, with a median average of less than $10,000. Establishing and growing a habit of contributions with a sound investment plan will have a much larger impact on what your 401(k) balance and net worth will be when you retire than the amount you have in your account at age 30.
Focusing on the process of building wealth rather than obsessing about an arbitrary number to hit in your 401(k), will set you up for long-term success and allow you to achieve your goals faster. So, the milestones to hit by the time you are 30 should be learning- and process-oriented. Strive to educate yourself on the following foundational elements of investing by the time you reach 30, and you’ll be set up for financial success in the coming decades.
1. Write down your financial plan
The simple step of writing down a financial plan can have a massive impact on your financial success. Most people fail to write down a detailed financial plan, even though studies show that households with written financial plans tend to save more each month for retirement. By the time you are 30, you should have a written plan that details how you intend to build an emergency fund, pay down debt, save for large purchases like a home, and invest for retirement. There’s no need to obsess over a perfect plan – it can and will change over time. In fact, revisiting the plan on an annual basis is a good habit to get into. Retirement is far down the line, and anticipating what your expenses will be 40 years from now is impossible, given the unpredictable nature of the economy and inflation, as well as your changing lifestyle. Establishing a target will give you something to work toward and provide you with the opportunity to improve your planning.
2. Start an emergency fund
An emergency fund is essential to ensure your plan stays on track. Unexpected expenses will happen. Though it may be difficult in your 20’s to build the six to 12 months of expenses that experts suggest, establishing an account for emergency expenses and adding to that account on a regular basis is an easy and important goal to hit by the time you are 30.
3. Understand account types and tax rules
By the time you are 30, you should understand the basic types of accounts that you will hold investments in – especially the tax treatment of those accounts. Investing for retirement or a child’s education, for instance, will usually mean investing in a tax-deferred or tax-free accounts. Some tax deferred accounts are funded with pre-tax contributions and taxed upon withdrawal. Examples include traditional IRAs and 401(k)s. Roth IRAs, Roth 401(k)s and 529 Plans, by contrast, are funded with after-tax contributions, but qualified withdrawals are tax-free. Investing in these tax advantaged programs can be a powerful wealth-building tool, but incurring penalties can be a problem if you don’t understand the rules.
Meanwhile, investing for a house down payment is usually done in a taxable (non-qualified) investment account. Such accounts may incur taxes on capital gains and ordinary income. By the time you are 30, you should have a good grasp of these account types and be able to choose the right account for the right situation.
4. Understand investment options
By the time you are 30, you should have a working knowledge of securities such as stocks and bonds, as well as investment vehicles like mutual funds and ETFs. As your knowledge grows, you can dig deeper into the details of these investments, but a general knowledge of the risks and potential returns for each asset class will allow you to diversify your investments enough to get started towards sound asset allocation strategies.
It’s perfectly acceptable to choose a simple, well-diversified investment to focus on at this stage. Target date funds can simplify investing by providing a single solution with diversified exposure and professional management. But it’s still helpful to educate yourself on the fund’s strategy and holdings to grow your investing knowledge. For instance, your retirement fund time horizon is longer when you are 30 so most people your age should consider a larger stock position for these assets. Checking the allocation of your target date (retirement date) fund will generally confirm a large allocation to stock funds. As the portfolio grows you should consider utilizing more of the asset class specific funds to diversify.
5. Learn the concept of compounding returns
While your 401(k) account balances may not be as large as you would like or appear to be growing fast at this point in your life and career, you have plenty of time to systematically add and benefit from compounding returns. Understanding the impact of compounding returns is pure motivation for starting your investment program sooner rather than later. The “cost of waiting” is expensive.
At this age you have time, if needed, to adapt and pivot towards new opportunities, often without too much financial pain, chalk it up to experience and do not get discouraged. You are likely still early in a career path, one of several that you may undertake in your lifetime and have the benefit of time to work towards higher incomes. Reaching 30 isn’t time for panic. If you aren’t where you want to be, there’s still plenty of opportunity for behavioral changes, career changes, overcoming mistakes and enlisting the support of a financial advisor to guide you through turbulent markets. If you focus on the process, stay disciplined and seek education, the likelihood of achieving financial independence will increase significantly.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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