David J. Perrotto
The Ultimate Financial Cheat Sheet at 30
Your 20’s were great, you finished school, you found your career, you earned a couple of raises, and now you’re finally 30. It was fun being reckless and care free. Now what? Maybe you are thinking of saving for a house, maybe you realize that expensive car payment isn’t worth it anymore because you understand it’s a depreciating asset, maybe you have a child and want to start to fund their future education costs. All these questions are great, and maybe you need a direction on where to start.
Start an Emergency Fund. This by far is the most important start to getting ahead. According to Investopedia, an emergency fund is an account used to set aside funds needed in the event of a personal financial dilemma, such as the loss of a job, a debilitating illness or a major expense. In 2013 the Federal reserve board conducted a study. They asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all.You should have no less than three months of expenses in a readily available liquid account. Expenses not only mean bills, but food, transportation, and what you need to live daily. This isn’t money that should be invested, it should be easily retrievable and accessible.
Pay down your debt. According to the FED, the average revolving debt comes in around 7,600 dollars. The average credit card interest rate is around 15%. If you carry an average daily balance of $3,000 in credit card debt, your minimum payment will be around $60 a month (assuming a 2% minimum payment). If the credit card charges a 15% APR, interest could cost you between $400 and $450 per year. That interest could pay a phone bill for four months, or even better, you can put towards retirement into a Roth/Traditional IRA.
Start saving for your retirement. Now. Today. With the power of compound interest, it is imperative that you start saving for retirement today, and not a year out, 5 years out. Start to adjust your budget any way you can to secure roughly 5% of your income into a retirement vehicle such as a 401K or IRA. I cannot stress the true cost of waiting to save. As you can see from the chart to the right, in only 5 years you would have to save almost 50% more. In 10 years, you would have to double your savings. Every day you wait to start the process, pushes you back in the long run.
A 401k will allow you to save more money than an IRA, and if you work for an employer that matches, it’s almost like getting a raise. Meaning if you have a 5% match, and you put 5% of your income into your 401k, your employer will double what you put in for the year. An easy example of this, if you saved 300 dollars a month for the entire year, when your employer matches, you would see an extra 3600 dollars, that goes in tax deferred! The next choice you have to make, is if you want to do ROTH or Traditional retirement accounts. A Roth retirement accounts gets funded with AFTER tax dollars, but allows you to take out money when you are over the age of 59 ½ TAX FREE. A traditional retirement account gets funded with BEFORE tax dollars, and allows you to write off what you put in against your taxes every year. You then would pay taxes when you take money out when you retire.
Stop spending money on depreciating assets. Saving money boils down to making good choices on the three biggest expenses in your adult life: the house you buy, the car you buy, and how much you pay for college. The average monthly payment in America topped 500 dollars a month for a car in 2016. That is not including insurance. We spend roughly 280 hours a year behind the wheel of the car, which translates to about seven 40-hour work weeks. Every mile you put on the car brings down the value of the car ever so slightly. If you were able to cut that bill in half, and save the latter for retirement, think about how much better you would be off in ten years.
Don’t buy a home unless you can afford to get a good mortgage with the lowest possible rate. For most American’s this will be the biggest purchase of your life. Before you think about making a purchase, make sure you can afford a down payment of 20% to avoid paying PMI. Also make sure you have a great credit score to have the absolute best rate. A 300,000 home, with a 270,000 mortgage with a 4.5% interest rate, along with paying PMI, comes in at 1,907. You would have paid over $220,698 in interest by the end of the loan. Consider if you put down 20% and had a 240,000 mortgage, at a rate of 3.92% your mortgage would be 1561 a month, and if you paid it by weekly instead of monthly, you would have paid $142,412 in interest. A whopping 80,000 dollars in difference that could go towards your retirement! Let’s take it a little further. If you paid 1000 extra a year, you would cut your mortgage by roughly 3 ½ years and save another 21,500 on interest! The bottom line is, make sure you can afford the home you are buying, and able to get a great rate, and the ability to pay more than is required.
Get healthy. Both mentally and physically. You have two assets that you can never get back once you’ve lost them: your body and your mind. Most people stop growing and working on themselves in their 20's. Most people in their 30s are too busy to worry about self-improvement. But if you’re one of the few who continues to educate themselves, evolve their thinking and take care of their mental and physical health, you will be light-years ahead of the pack by 40.
DON’T BE AFRAID OF TAKING RISKS. The biggest regret most people have at 40, is the risks they didn’t take when they were 30 to right the ship and be happy. Most feel they should have their career dialed in, but it is never too late to reset. The individuals that have seen with the biggest regrets during this decade are those that stay in something that they know is not right. It is such an easy decade to have the days turn to weeks to years, only to wake up at 40 with a mid-life crisis for not taking action on a problem they were aware of 10 years’ prior but failed to act. You must act!
Ideally, this will start reaping benefits and point you in the right direction going forward, so when you are 40, you are better prepared for your midlife. If not, don't worry - it's not too late to start, but it is time to get going so you have some progress to show by the time you turn 40. All of these can be achieved with the help of a licensed financial. So don’t be afraid to reach out, if you don’t have any one of these items on your check list.