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Looking back at my 20s, it seems like a blur. I graduated college at 21 and quickly accepted the first job offer I received with health benefits. This was before you could stay on your parent’s plan until age 26.
My first job was a bit of a dud. It had nothing to do with my degree. But, like I said, I wanted those benefits. Even though I never experienced any major health issues, I thought, better to be safe than sorry.
After a few years, I jumped into the Federal Government. It wasn’t necessarily smooth sailing from there though. Along the way, I made a ton of mistakes. I didn’t max out my 401k contributions. When I received raises, I initially just wanted to enjoy them. I even bought a sports car that I didn’t need.
When I turned 30, something hit me. I knew that I needed to get my act together. Here are some of the smart money moves that I made in my 30s that I’d recommend to anyone trying to get their finances in order.
1. Review Your Budget and See If It Aligns with Your Values.
In my 20s, I bought a bunch of junk that I really didn’t need, sometimes just because I could. I paid for DirecTV’s Sunday Ticket, even though I barely had anytime to watch TV at the time. I paid for magazine subscriptions that typically ended up unread and in the trash. My gym membership also went sorely unused each month.
As my 30s approached, I decided that I needed to reevaluate how I was spending my money. Although my paycheck felt fairly big, that didn’t mean that I had to spend all of it. I found a lot of fat in my budget that I could trim. At the time, it felt pretty painful. But, I knew that I couldn’t continue spending the way I was. Honestly though, looking back, I don’t know why it took me so long to get rid of the Sunday Ticket. The Washington Redskins have been playing so badly over the years. That decision was definitely necessary.
Revamping my budget allowed me to concentrate on paying off my mortgage. It also helped me dig myself out of the financial hole I was in.
2. Adjust Your Emergency Fund.
Your expenses may vary between your 20s and your 30s. I personally recommend that you have 3-6 months worth of expenses saved in an online bank account that will pay you some interest.
In my 20s, I lived paycheck to paycheck. It was nerve-wracking each month to pay all of my bills. I felt like I was on the brink of failure most days. I depended on my roommates to pay me rent on time. If they were a day late, I had a mental meltdown, as I had very little to spare to cover the bills in their entirety, without my roommates’ contributions.
Sadly, many others know that feeling all too well. Nearly half of Americans don’t have $400 readily available if an emergency occurs, according to a recent Fed Survey.
Needless to say, if I had an emergency fund in place in my 20s, I might have a few less gray hairs today.
3. Rollover Your 401(k) When You Leave Your Job.
According to Aon Hewitt, 43% of workers cash out their 401(k)s when they leave their employer for a new company. Is that as disturbing for you as it is for me? Nearly half of employees forget about investing and allocate those funds towards something else. That is astounding.
This may be due to a few different reasons. The most prevalent is that when someone leaves their employer, they may assume that since they are no longer with the company, they need to close out the account. Others may choose to do so because their balance is small, such that they just don’t care about sustaining that account.
Before cashing out your 401(k), I encourage everyone to look into their ability to roll it over into their new 401(k) plan, if it’s good plan. Otherwise, you could rollover those funds into an IRA. This will ensure that you have full control over your account in the future.
You never know what might happen to your old company. They could make poor decisions surrounding 401(k) options. Your old 401(k) could automatically be placed in a default option that you might be unhappy with.
4. Increase Your 401(k) Contributions
One of the best pieces of advice that I received from a co-worker when I first started working for the government was that if I received a pay raise during the year, I should increase my contribution by the same amount, until I could max out the 401(k).
He told me about numerous people who had done that and were able to retire in their 50s, along with the government pension. However, in my 20s, I didn’t apply that advice because I was more focused on paying off my home.
I contributed more towards my mortgage, which allowed me to pay it off in 8.5 years. Whether you contribute to a 401(k) or towards your house, don’t let lifestyle inflation affect you.
5. Contribute Towards Your Roth IRA.
I always recommend diversifying your tax risk in the future. Depending on which political party is in power, it’s hard to know which to contribute more towards– your 401(k) or your Roth IRA.
Therefore, I contribute to both my Roth IRA and my traditional 401(k). That way, if taxes go up in the future, I’m covered by the Roth IRA, since you can withdraw the contributions and earnings tax-free, once you reach the age of 59 1/2. If taxes go down in the future, I’m covered by the traditional 401(k).
First, I contributed up to my 401(k)’s match. Then, I maxed out my Roth IRA before I maxed out my 401(k). This allowed me to properly diversify along the way.
6. Create a Health Savings Account (HSA).
In order to qualify for a HSA, you enroll in a high-deductible health care plan (HDHP), according to the IRS.
You may have heard that HSAs have a triple tax advantage. What does that mean? Let me break it down.
An HSA allows the account owner to pay for current health care bills, while also saving for future medical expenses. The first advantage of an HSA is that contributions are tax-deductible. The second advantage is that the contributions grow tax-free like a 401(k). Finally, the third advantage is the account owner may withdraw from the HSA tax-free for qualified medical expenses. There you have it– triple tax advantage.
7. Invest in the Stock Market.
According to Bankrate.com, nearly 1 in 3 millennials do not invest in the stock market. Many of them confessed fear from the Great Recession and that they try to invest in safer options. Never mind that since 1926, the stock market has had an annualized return of over 10%.
I met with a woman recently who indicated that she only invests her money in Certificates of Deposits because she can’t handle the wild swings of the stock market. She is 32. I explained to her that if she had bought at the very top of the stock market in 2007, her money would have doubled by now. Instead, her CDs have significantly underperformed the stock market. It appears that based on her conservative investment style, she may have to defer retirement in the future.
If you’re not sure where to invest, robo advising might make sense for you. Read about my experience with using Wealthfront and Betterment.
8. Phone a Friend.
Harvard conducted a study that found that when peers commit to reaching a shared but individual goal, they are more likely to reach it. In this case, when peers committed to a common financial goal, the number of deposits increased by 3.7 fold, and the average savings balance almost doubled.
Having an accountability partner is always beneficial. Whether it’s exercise, studying, or even finances, a friend can be extremely helpful for you in reaching your goals.
9. Utilize the Debt Snowball, Not the Debt Avalanche.
When you carry debt, you should pay off the highest interest rate balance first, right? Wrong. Study after study has shown that if you concentrate on paying off the lowest debt balance first, instead of the highest interest rate, the psychological boost from eliminating a loan helps motivate you to keep paying down your debt.
10. Make Sure You Have Proper Insurance.
I live in an extremely expensive part of the country. It’s not uncommon to see Lexuses, Teslas, and Ferraris driving by me on my way to work.
For far too long, I was underinsured with my car insurance. I wasn’t taking into account all of these costly vehicles around me. It wasn’t until I heard about someone causing a 34-car-pile-up close by that I quickly realized that if that were to happen to me, the insurance company would go after all of my assets.
That’s when I decided to increase my coverage, which included obtaining umbrella insurance.
Since that time, I do a yearly check to make sure that I am properly insured. I also try to shop around to see if I can find a better deal. In doing so, last year alone I was able to save $200 on insurance, without cutting back on coverage. Not a bad way to save some money!
11. Save for a Home.
Most of my friends started to look into buying a home in their late 20s and early 30s. If you plan to buy a home in the future, ideally you should save at least 20% down, in order to avoid paying private mortgage insurance.
I knew many who were determined to buy a house before the housing crash and barely put any money down. They ended up upside down on their homes. Many of them walked away from them as they went into foreclosure.
That mistake has haunted many of them. The blemish on their credit report is taking years and years to diminish.
12. Start Saving for Children.
The average price to raise a child in the U.S is $233,000, according to the Department of Agriculture. And that doesn’t even include college expenses. If you plan to have children in the future, you need to consider some of the costs. Of course, it varies from location to location, but any way you look at it, a child will cost you something.
I previously shared how my wife and I saved money with our baby. By setting up Craigslist alerts, we were able to find many baby items for very low prices or even free. This saved us a lot of money along the way and greatly reduced our expenses.
In fact, we use that cost savings to contribute towards 529 plans for both of our sons each year.
13. Keep Your Eyes on the Prize.
It’s all too easy to envy other people’s lifestyles and then try to emulate them. It was really tough for me seeing all my roommates enjoy their money with new cars and gadgets while I was driving an old car and using an outdated cell phone. Admittedly, there were times that I wanted to scale back on my investments and live a little.
In hindsight, I am incredibly thankful for my discipline during those years. I now have 20x my expenses saved up. In a few short years, I should be able to reach FIRE.
I won’t say that it’s been easy keeping my eye on the prize. But, I can tell you that it’s been 100% worth it.