You’ve made it to the big 3-0. By now, you’ve hopefully left behind the ramen noodle-slurping days of your twenties and are starting to enjoy a more grown-up life, with the higher income it often brings with it.
Your income isn’t the only thing that changes as you enter your thirties. Many people also tend to take on more responsibilities during that decade, whether they buy a house, have a child or two, or start to think more seriously about their retirement. Following several financial rules will help you stay on track when it comes to your money and get through your thirties with your financial health intact.
1. Build a Realistic Budget
As you get older and your financial responsibilities increase (and as your income grows), you’re going to want to make sure your budget really reflects your life and goals, so that you are on track to meet whatever goals you set. Creating a realistic personal budget involves two basic steps, as well as some assessment of what you’re spending and whether or not your spending habits are keeping you from reaching your financial goals.
You can use pen and paper to make your budget, but spreadsheet or budgeting software can make the process easier, as they can do the arithmetic for you and, in some cases, connect directly to your accounts. There are many budgeting programs available out there, such as Learnvest, Mint, and Mvelopes.
Know Your Expenses
The first step to building a budget that works for you is knowing what you’re spending your money on each month. While it can be easy to track your fixed expenses (such as your mortgage or rent payment, utility bills, and car payment), it can be more difficult to track the more frivolous expenses, such as an occasional cup of coffee, a restaurant meal, or an impulse purchase at a clothing store.
Since it can be easy to omit the expenses we’d rather not admit to, it’s a good idea to use a budgeting program or app to keep track of things. No swipe of the credit or debit card escapes the eye of the budgeting program – and while it can be a little disheartening to realize how much you spend on take-out in one month, it is the best option to keep yourself honest about your spending.
Know Your Income
The second step when building a budget is to determine exactly how much you earn every month. You want to be sure that how much you spend doesn’t exceed how much you earn. If you have one source of income and the taxes are taken out of your paychecks automatically each month, tracking your income can be simple.
It gets more complicated if you are a freelancer with multiple sources of income or if you have an irregular income. In such cases, it can help to track your income and spending for several months so that you get a sense of your average earnings. And remember, if your income is irregular, it helps to use a low estimate so that you don’t accidentally overspend.
A budgeting program can be the easiest way to compare your income to your expenses each month, since you can link it to various accounts, such as your credit cards, bank accounts, and retirement accounts. By doing so, it automatically tracks your income and expenses. Many programs use pie charts and bar graphs to display your income, spending, and saving each month. Or, you can simply list expenses and income on a sheet of paper (or in a spreadsheet) to ensure that you set aside enough money each month in your various savings funds.
Separate “Wants” From “Needs”
Once you have a some hard numbers for your income and expenses, determine how much you’re spending on the things you need (such as food and housing) and how much you’re spending on the things you want but can live without.
Figuring out if you’re spending too much on “wants” is a personal process. For example, you might spend $1,000 on clothing each month, but your income might be substantial enough to support this habit without damaging your savings accounts.
There are a few questions you can ask yourself to determine whether a particular spending category should be reevaluated or trimmed:
- Is the expense keeping you from saving?
- Do you cut back on things you need to cover it?
- Do you use a credit card for the expense and struggle to pay it off each month?
If so, you should either eliminate such expenses, or at least find a way to reduce the costs.
Find Ways to Boost Your Income
In your thirties, you’re likely working your way up the career ladder, and your income has risen to reflect that. According to PayScale, the income of men and women with college degrees typically increases by 60% from the time they are 22 to the time they are 30. To help you reach any goals throughout your thirties and beyond, it’s important to consider ways to continue to boost your income.
Finding additional part-time work or doing odd jobs can help you increase your revenue, but an ideal strategy is to find a way to maximize what you already do for work. Enrolling in a master’s degree program might help you get a raise, and in some cases, your company might actually pay your way through school. Another option is to consider a lateral move to a new employer, or a move to a new department at your current company.
2. Know Your Retirement Options
It’s never too early to start saving for retirement. In fact, the ideal time to start saving for retirement is when you first enter the workforce. However, even if you haven’t yet started, it’s not too late to start now.
The money you contribute to a retirement account is either tax-deferred or after-tax. In the case of tax-deferred accounts, you deduct the amount you contribute in the year you make the contribution from your income tax return. You don’t have to pay tax on the money in those accounts – whether the original contribution amount or the earnings – until you actually withdraw it. For example, if you withdraw $1,000 from a tax-deferred account in the year 2050, you will pay taxes on the $1,000 that year.
In the case of after-tax accounts, you pay the income tax on the amount you contribute during the year you make the contribution. When you do reach retirement, you can withdraw your original contribution without owing any additional tax.
Keep in mind that as of 2015, retirement age is 59-and-a-half years or older. If you try to withdraw money from certain accounts before you reach that age, you’ll be hit with a penalty tax of 10% and will have to pay income tax on the amount you take out.
You might think of a Roth IRA as the most flexible of all the retirement options. It’s an after-tax account, so you pay tax the year you make the contribution. To contribute to a Roth IRA, all you need is a source of earned income.
There is an income limit for contributions to a Roth and a contribution limit for each year, which the IRS raises occasionally based on inflation. In 2015, the income limit is $131,00 for single people and $193,000 for married couples who file jointly. The 2015 contribution limit is $5,500.
A potential advantage of a Roth IRA compared to other retirement accounts is that you are able to withdraw your original contribution at any time, without penalty. That means you can use money you’ve contributed to a Roth IRA to pay for an emergency or to cover another big expense without being subject to a 10% penalty or income taxes.
Of course, if you withdraw from your Roth IRA for non-retirement reasons, you might cause yourself financial harm in the future, so doing so isn’t usually recommended. Also, if you withdraw earnings from a Roth IRA before you’ve reached retirement age, those withdrawals are subject to a 10% tax, with few exceptions. (Exceptions may include if you use the funds to buy a first home or to pay for college, or if you become disabled.)
One of the differences between a Roth and a traditional IRA is the taxation. In most cases, traditional IRAs are tax-deferred accounts. You pay tax on earnings and, in most instances, contributions once you start taking withdrawals.
However, there are instances when the money you contribute to a traditional IRA is after-tax. If your modified adjusted gross income is above a certain amount (depending on your filing status) and you are covered by a retirement plan from your employer, you may only be able to deduct part of the amount you contribute – or none of your contribution, if your income is high enough. Your modified adjusted gross income is your adjusted gross income with any “above-the-line” deductions (such as student loan interest or tuition and fees) added back to it.
Traditional and Roth IRAs vary regarding their early withdrawal penalties. If you take money out of your traditional IRA before you turn 59-and-a-half, you need to pay a 10% penalty tax on the amount you withdraw, plus income tax on the full amount, including your original contributions and earnings. There are some exceptions to the 10% penalty rule, such as if you use the funds from a traditional IRA to purchase your first home or to pay college costs.
Another major difference between a Roth IRA and a traditional IRA is when you have to withdraw funds. You are welcome to leave your money in a Roth IRA until you pass away. However, with a traditional IRA, you need to start taking minimum distributions (withdrawing a certain amount) every year, starting at the age of 70-and-a-half. If you don’t withdraw the minimum required each year after this age, you’ll be slapped with a 50% excise tax on the amount you don’t withdraw (as of 2015).
The contribution limit is the same for a traditional IRA as it is for a Roth IRA, and the amount you can contribute to your IRAs is actually combined. This means that if you have one Roth IRA and one traditional IRA, you can only contribute up to $5,550 total to both, as of 2015. You can’t put $5,500 in one and $5,500 in the other.
401k or 403b
Depending on your employer, you might have the opportunity to contribute to a 401k plan or a 403b plan at work. The big difference between the two plans is who offers them. If you work at a school or nonprofit, odds are that your retirement plan is a 403b. If you work at a non-tax-exempt, for-profit company, it’s likely that you have a 401k plan.
Both 401k plans and 403b plans are tax-deferred, so the amount you contribute is tax-deductible when you make the contribution. You then pay tax on anything you withdraw, once you are age 59-and-a-half or older. As with a traditional IRA, if you withdraw any money from a 401k or 403b before you turn the golden retirement age, you’ll pay a 10% penalty on the amount you take out, plus income tax.
In many cases, you’ll never even see the money that goes into the plan, as it is often deducted directly from your paycheck. Like IRAs, there is a contribution limit for either plan. But unlike IRAs, the limit is pretty high: $18,000 per year as of 2015.
If your employer offers either option, it’s in your best interest to start contributing to it, if you haven’t already. Some employers offer to match contributions, up to a certain amount, such as a 100% match of your contributions, up to 5% of your income, so it’s a good way to increase your income. The money you contribute is yours and remains yours, even if you wind up moving on or taking another job.
If you’re self-employed, don’t think that you can only contribute a maximum $5,500 per year to a traditional or Roth IRA. The simplified employee pension IRA, or SEP IRA, looks like a traditional IRA, in that your contributions are tax-deductible, but there is one major difference: The amount you can contribute is significantly higher. In 2015, you can contribute up to 25% of your income or $53,000, whichever is lower. Other than an increased contribution limit, a SEP IRA has the same rules as a traditional IRA when it comes to taxation and distributions.
If you aren’t sure how to make the most of your retirement savings or determine the best plans, it might be a good idea to hire a financial advisor. He or she can help you make sense of the rules and figure out how to save to best plan for retirement.
3. Get Serious About Eliminating Debt
If you’re like many Americans, you might have student loan debt, credit card debt, and a host of new debts, such as a mortgage and a car loan. You may have cruised through your twenties making the minimum payment on everything – but if you want to push ahead financially in your thirties, it’s time to take closer look at what you owe.
Focus on Credit Card Debt First
Credit card debt tends to have very high interest rates. Ultimately, it doesn’t do you any good in the long run, since you end up paying more for things that don’t help you build wealth, and may even lose value.
If you are carrying a balance on your credit cards, it’s time to focus on paying it off. Take a look at your budget, crunch some numbers, and figure out what you can afford to put toward the debt to eliminate it in the shortest amount of time. To reduce the amount you need to pay in the long run, it is helpful to focus on paying off the card with the highest interest rate first. However, if you need a motivational boost, paying off the card with the lowest balance – regardless of interest rate – can do just that.
Don’t Fret About Some Types of Student Loans
While student loans can be a nuisance, but they can also be a lot more benign than other types of debt. Federal student loans have a fixed interest rate and allow you to choose a payment plan that works with your current financial situation.
For example, if you borrowed before 2014, you can choose an income-based repayment plan, which caps the amount you pay each month at 15% of your discretionary income. Your family size and income play a part in determining eligibility for the plan, as does the size of the monthly payment. If your monthly payment under an income-based repayment plan is more than it would be under a standard 10-year repayment plan, you don’t qualify. Under the income-based repayment plan, any amount you haven’t paid off is forgiven after 25 years.
Another potential benefit of federal student loans is that the interest you pay can be deductible if your adjusted gross income is either less than $80,000 if you’re single, or less than $160,000 if you are married filing jointly. In contrast, the interest on private student loans tends to be higher and isn’t deductible in most cases.
If you have both federal and private loans, it may be best to focus on paying off the private loans, while making the minimum payment on federal loans. Once the private loans are paid off, you can then turn your attention to paying off your federal loans.
Be Realistic About Housing Debt
If you’re thinking about buying a house, try not to bite off more than you can chew when it comes to the loan. Generally, it’s recommended that the amount you pay toward housing not be more than 28% of your gross income. That means if you bring in $3,500 per month before taxes, the monthly cost of your mortgage – including principal and interest, as well as the cost of property tax, homeowners insurance, and private mortgage insurance – shouldn’t be more than $980.
4. Don’t Neglect Insurance
Health insurance is just one policy you should have in your thirties and beyond. In addition to protecting your health, it is important to safeguard your possessions and the people you love.
Life insurance isn’t something that only elderly people need to purchase. The purpose of life insurance is to offer a financial security blanket to your loved ones should you or your spouse pass away. It actually makes more sense for younger people who are supporting a spouse or partner or who have children to own a life insurance policy.
Should something bad happen to you, the plan will pay your survivors a specific amount, which you choose when you apply for the policy. Usually, the face value (or “death benefit”) of your life insurance is something you determine based on your income and how much you can afford when it comes to premiums. The higher the benefit paid to your survivors, the higher the monthly premiums.
There are two general types of life insurance policy: whole life and term. Term life insurance offers protection for a set amount of years, such as 20 or 30 years. You pay premiums for that amount of time, and if anything happens to you, the plan pays out. After the term expires, you are no longer covered. Term life insurance policies are less expensive than whole life policies.
Whole life insurance policies, sometimes also called permanent life insurance, last for the rest of your life. They tend to be much more expensive, since they provide coverage for a longer period of time, and the likelihood of you dying while you have a whole life insurance place increases to 100%. There is often an investment cash-value component built in to whole life insurance policies, which you can borrow or withdraw from, meaning that you can benefit from the policy while you are still alive. Buying life insurance can be complicated, but it is worth the slog through all the details to give your family an essential layer of protection.
Home or Renter’s Insurance
If you are currently renting your home, renters insurance can be a great investment to protect the items inside the house. When you own your home, purchasing a homeowners insurance policy is part of the deal.
If you already have a renters or homeowners insurance policy, it’s important to review it regularly to make sure it still meets your needs. For example, in your twenties, you might have had cheap furniture with a low replacement value. Now that you’re older, your stuff might be a bit more valuable, and you may want to upgrade your policy to provide more coverage.
You may also have additional valuable items (such as an engagement ring, a family heirloom, or a pricey musical instrument) that require additional coverage. In that case, a personal articles floater should be added to your insurance policy. Have your valuables appraised every year or so, and review the coverage offered by the floater to ensure that it still provides ample protection.
Homeowners and renters insurance policies also offer liability coverage. A policy can offer some protection if an accident takes place at your home and the person injured in the accident sues you. For example, if a piece of carpet is loose at the top of the stairs and a guest trips and is injured, your insurance policy will likely pay for damages and legal costs.
Your homeowners insurance policy can also cover the cost of rebuilding your home if it is destroyed or damaged. Since the cost of rebuilding a home and the value of your home is likely to increase each year, it’s worthwhile to review your policy regularly to make sure it still provides sufficient protection.
If you own a car, you need auto insurance. Car insurance policies offer various types of coverage, such as bodily injury and property damage (damage to another person’s car or property), as well as collision (damage to your own car), and comprehensive (damage to your car that occurs for reasons other than a car accident).
The higher the value of your car or the more you owe on it, the more likely it is that you’ll need protection above and beyond what’s legally required by your state. Every year, review your auto insurance coverage to make sure it remains appropriate for your vehicle and personal situation.
Your health insurance needs change once you get to your thirties. For one thing, you’re no longer eligible for the cheaper catastrophic plan option, which only provides coverage for worst case scenarios and very basic preventative care. Catastrophic plans are only available for people under age 30 with a hardship exemption.
Furthermore, getting married or having a baby means that you need to make adjustments to your policy. For example, if you’re thinking about having a baby, it’s wise to choose a plan that offers some amount of maternity care coverage.
No matter how healthy you are at the moment, don’t think you can skip health insurance. It not only protects you, but it’s also required due to the Affordable Care Act. If you neglect to get coverage, you’ll need to pay a tax that’s equal to either 2% of your income (for 2015) or $325 per person, whichever is higher.
5. Don’t Forget to Save
While it is important to focus on increasing your retirement savings, it’s not the only thing you need to save for.
The more responsibilities you take on, the more unpredictable life can be. That’s why an emergency fund, with enough cash in it to cover several months’ worth of income, can be so useful. Generally, your fund should contain anywhere from three to eight months’ worth of income. The more unstable your income, the more you should have in your fund to help you survive any rough patches.
If you do not yet have an emergency fund, open a new savings account and start setting aside what you can afford each month according to your budget. Setting aside $1,000 over the course of a few months or a year is better than not having any sort of cushion. Without any savings, you may have to turn to credit cards when your car breaks down or your income takes a dip, meaning you can wind up paying high interest rates and potentially damaging your credit score.
Your Child’s College Fund
Data from the USDA reveals that it would cost nearly $250,000 to raise a child born in 2013 to the age of 18 – and that amount doesn’t include the cost of college. Your little one might still be in diapers, but it can be worth it to start exploring college saving accounts today.
One option is to open a 529 college savings plan for your child. Each state has its own 529 plan program, and some states actually have several. 529 plans offer tax advantages, as long as your child ends up using them to pay for college or other qualified education expenses, such as textbooks and fees. You do pay income tax on the contributions you make to the plan, but the earnings are usually exempt from federal taxes and might be exempt from state taxes too.
Opening a 529 plan in one state doesn’t mean your child is limited to attending college in that state, nor does it limit him or her to attending a public school. You are also not limited to opening a 529 plan in the state in which you live in. If a plan from another state offers better incentives or a better deal, you can look into opening an account.
No matter your age, you should not use credit cards to make major purchases that you cannot afford to pay off in full at the end of the billing cycle. If you want to invest in something pricey – whether it’s a family vacation, a new car, or a home improvement – set aside a certain amount each month until you have enough to cover the cost. Saving for a big expenditure might not bring the thrill of recklessly charging something, but it also doesn’t bring the pain of repaying the debt.
Between storing money in various savings accounts and minding your personal budget, there’s a lot to keep track of when it comes to your finances. Just remember, it’s okay to take small steps. Get your budget, debt, and insurance matters under control first. Then, focus on your retirement and other savings.
Also, keep in mind that everyone’s financial situation is different. Do your best to minimize your debt, protect yourself and your family, and plan for your future.
Are you in your thirties? What financial rules do you live by?