How should you be saving in your twenties and thirties?

Your twenties and thirties can be quite a whirlwind. So much in your life is changing, and rapidly. There are many decisions to make and so much to plan for. It’s easy for your financial health to take a backseat to other more immediate or exciting decisions such as job interviews, getting married, buying a home, or even having a baby. Trust me on this: a bit of thoughtful financial planning in early adulthood will result in major payoffs later in life.

Do you ever wonder what you should be doing with your finances right now? In terms of spending and saving, let’s discuss what current and future goals you should be working on now.

 Twenties

Your finances are most likely a lot simpler now than they will be in the future, when you may be juggling priorities like saving for a down payment on a house, while also starting a family. Your twenties are an ideal time to establish good money habits that can help carry you through the next decades. I’m often asked if new college graduates should pay off credit card debt, or student loans, before they start saving for the future. My answer is: Yes. Always be proactive with paying off debt. However, split your discretionary income each month between debt service and savings, working on both goals simultaneously. Time is on your side. You have many years ahead of you to benefit from compound interest. In your twenties, your life is a marathon, not a sprint.

Your first savings goal should be a cash reserve equal to at least three months’ worth of living expenses. As soon as you have a cash reserve account funded, start saving for retirement, even if you still have some debt to pay off. The earlier you start saving for retirement, the sooner you will achieve financial freedom. Then you will have options on how to spend your time. In other words, you can choose to travel, volunteer, or spend more time with your family. Trust me, the benefit of compound interest is something you don’t want to miss out on in your twenties. Plan to monitor your accounts and goals at least once per year. Life will happen. Over time, you may need to make adjustments to your savings plan.

If you have a company-sponsored retirement plan such as a 401(k), make sure you’re contributing the maximum allowable contribution that you can afford, especially if your employer provides a match of a certain percentage of your income. The maximum allowable personal contribution changes every year. In 2018, the maximum personal contribution is $18,500. If an employee is over age 50, they are also allowed to contribute an additional $6,000 as a catch-up provision for a total of $24,500. Any matching funds your employer contributes to your personal retirement plan is free money to you. The employer’s contribution is in addition to the $18,500 to $24,500 that you’re allowed to contribute. Remember, contributions to retirement plans are tax deductible.

Thirties

The financial decisions you made in your twenties, and the decisions you will make in your thirties, will have a large impact on your forties, fifties, and beyond. During this decade, your financial goals are likely to get a bit more complicated. Many people are still paying off credit card debt and/or student loans, working on building emergency savings, and kicking retirement savings into high gear – while also buying a home and starting a family. This is why it’s so important to gain focus and be more prudent with your finances in your thirties. Make sure you keep a close eye on your budget so you can set up realistic savings goals for yourself and your family.

Big life events such as getting married, having kids, or buying a house are important times to assess whether your insurance needs are being appropriately met. If you have children, securing term life insurance now will help them maintain financial security in the future if anything should happen to you. In addition, you’ll probably have to plan for childcare costs, as well as starting to save for college. For the latter, consider opening a 529 plan.

A 529 plan is a state sponsored program designed to help families save for future higher-education expenses. You can contribute to a 529 plan until your account value reaches $500,000. Earnings in 529 accounts grow on a tax-deferred basis. Most importantly, withdrawals for qualified higher education expenses can be withdrawn free of federal income tax when used for qualified education expenses at accredited post-secondary schools, such as colleges, universities, community colleges, and certain technical schools. Qualified expenses include tuition, fees, books, and supplies. Contributing what you can now to a 529 plan will help defray tuition costs and other college fees down the road.

Regardless of which stage of life you’re currently in, I want to strongly encourage you to begin a savings plan if you haven’t already done so. It’s never too late to start saving! Then continue to monitor your goals and savings needs throughout each decade of your life. Systematic savings plans will make all the difference in terms of reducing stress levels in regards to your personal finances.

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About Emily G. Stroud

For two decades, financial advisor, entrepreneur, speaker, author and mother, Emily G. Stroud, has counseled clients on how to handle money, manage risk and plan for their financial future. Stroud is the owner and manager of the investment firm Stroud Financial Management, Inc. She holds an MBA, as well as the Chartered Financial Analyst (CFA) credential. Her newest book, “Faithful Finance: 10 Secrets to Move from Fearful Insecurity to Confident Control,” is out now. She lives in Fort Worth with her husband and two children. For more information, please visit EmilyGStroud.com.

*Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, and Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Stroud Financial Management, Inc., are not affiliated.