Building wealth starts with having the right goals in place. But your financial needs and goals in your 20s will look vastly different from those in your 40s. Hence, your financial priorities change as your life changes. With that in mind, here is a list of financial priorities in your 20s, 30s and 40s that can help you stay on track.
Financial priorities in your 20s
Your 20s are a financial launching pad. Although your income is likely at its lowest point in your adult life, you have the greatest amount of opportunity. That’s because you are wealthy in one important asset: TIME. You can leverage time to significantly raise the chances you achieve financial independence.
Creating a budget
The biggest challenge for 20-somethings is coming up with enough money to actually set aside and invest. That’s where a budget comes in. It details where your money is coming from and where it’s going, separating your fixed expenses (rent, utilities, etc.) from your discretionary expenses (entertainment, travel, etc.). It helps you control your spending, manage your savings and focus on your long-term financial goals.
Building an emergency fund
An emergency fund provides greater financial security by acting as a safety net for emergency expenses, such as the loss of a job, a medical problem or major home repairs. A good rule of thumb is to save 3-6 months’ worth of expenses. Your emergency fund should be kept in a place where you can access it easily and quickly, such as a checking or savings account, separate from those you use daily.
Paying off high-interest debt
It’s impossible to build wealth if you pay more in interest than you earn. Therefore, if you’re carrying any high-interest credit card debt, you want to focus on that first, because it’s costing you the most. The most efficient way to pay off debt is with the debt avalanche method, in which you start with the highest interest rate balance and then work your way down.
Saving in a retirement account
For most people, this will mean saving in an employer provided retirement account, such as a 401(k). Another option, especially if you’re a freelancer or independent contractor, is to save in an individual retirement account (IRA). These are tax-advantaged accounts, meaning your contributions can help reduce the amount of income you report to the IRS.
The earlier you start saving and investing, the longer you can take advantage of compound interest, the interest earned on your interest. As an example, let’s say you earn a $55,000 salary and start saving 15% of your paycheck in a retirement account at age 25. Assuming a 6.5% annual return, you’ll have $1,023,286 by the time you reach age 60. But if you put off saving until age 35, your balance at age 60 would be less than half at $485,823.
Protecting yourself with health and disability insurance
All the planning in the world won’t keep you from life’s unexpected events. Whether you’re in perfect health or not, it is crucial to have health insurance to protect yourself and finances. Consider that most people who file for bankruptcy cite medical issues as the primary reason, according to a study published by the American Journal of Public Health.
If health insurance is not provided by your employer, shop around for coverage through the Affordable Care Act healthcare exchange.
Depending on your profession, you may also want to consider disability insurance, which replaces a portion of your income if you can’t work due to illness or injury.
Increasing your earning potential
The reality is that you can’t just cut your way to wealth. You have to also focus on increasing the amount of money you have coming in. One of your most valuable assets is your ability to earn a higher income. So, prioritize skill building and moving up the career ladder. If there isn’t room to earn more in your job, then consider setting up a side hustle. You could turn a hobby or particular skill into an additional stream of income.
Financial priorities in your 30s
Hopefully, by your 30s your income has taken an upward trajectory alongside your accumulation of work experience and skills. Around this time is when your financial goals start to compete against each other. It’s the decade when you’re likely to make some of your biggest decisions regarding your family and career, along with saving and investing for financial independence.
Boosting your retirement account savings
With your income probably rising, you should make the most of any tax-advantaged retirement accounts. Employer-sponsored retirement accounts and IRAs will be a primary source of wealth for most people. So, you want to maximize your savings as much as possible. Check out how much you're saving in your accounts and see if you can increase your contributions.
Prioritizing your financial goals
Vacation. Home or car down payment. Wedding. College. Now is when you are likely to find yourself juggling financial goals. You can keep moving toward each goal by efficiently prioritizing each one. Above all is your financial independence, so make that your top priority followed by the rest based on how important they are to you, their total cost and when you want to achieve them.
Getting married? Have the talk
Know what’s most likely to ruin a marriage? No, not infidelity. Money. Money is the leading stressor in romantic relationships. You can reduce that stress by simply starting a financial dialogue. Talk about all your financial details, including how much you earn, your credit score and what you own. Then, write down what financial goals you want to achieve together, such as buying house, traveling and starting a family. Both of you should feel obligated to participate in your household finances, from creating a budget and paying bills to saving for retirement.
Purchasing life insurance
If you get married and have children, it’s time to purchase a life insurance policy to help protect your family. Figure out how much your spouse and kids may need to cover expenses like childcare and housing costs as well as for savings, both for retirement and education. A fixed term life insurance policy of 20 or 30 years is the right option for many people. Other policies, such as whole life and variable, often have higher fees and various restrictions.
Setting up a 529 account
If college will be a priority for your child, then you should consider opening a 529 plan, which is a tax-advantaged investment account designed for college and other higher-education expenses. They are sponsored by most states. And some states allow you to deduct contributions from your taxes.
Avoiding lifestyle creep
With a bigger paycheck and bigger goals, it’s easy to fall victim to lifestyle creep. A simple way to keep lifestyle creep in check is to review and update your budget. Look for problem categories that may be taking a big bite out of your budget. Then, identify specific expenses that you are comfortable reducing or cutting entirely.
Establishing basic estate plan documents
Estate planning isn’t only for older adults. Young parents, for instance, need to set up estate documents to establish guardians for their children and any type of inheritance. By your 30s, you should at least write up two important estate documents. One, a will or living trust that specifies your wishes, including how your financial assets are to be managed upon your death. Two, an advance health care directive, or living will, which specifies how you wish to be cared for upon suffering from a severe medical emergency.
Financial priorities in your 40s
It may not feel as though your 40s hold the promise of your 20s or the significance of your 50s. But many full-time workers hit their peak earning years in their 40s, according to compensation research firm PayScale. That makes this decade a critical and opportunistic time your financial life.
If you haven’t checked your portfolio in a while, look at your retirement accounts to see if there is for any room for improvement. With possibly many years still left before you hit your retirement date, it’s generally okay if stocks make up the bulk of your retirement accounts. Over time, though, fluctuations in the stock market may have pushed your desired asset allocation out of line. You may have more risk in your portfolio than you’re comfortable with. Rebalance your accounts by selling what’s up and buying what’s down.
Keeping your savings on track
One way to judge your wealth-building progress is to compare where you are now with where you are supposed to be. A 40-year-old with a household income of $60,000 should have 2.1 times their salary in retirement savings, or $126,000, to maintain their current lifestyle, according to JP Morgan’s Guide to Retirement. If you’re falling short, it’s time to start increasing your retirement account contributions, if possible.
Consolidating accounts and investments
By your 40s, you may have worked several jobs and may have different accounts spread around. You can more efficiently manage your investments by consolidating or merging those accounts into one, such as rolling over old 401(k)s into a single IRA or your current workplace plan, if allowed.
Reviewing your insurance needs
As your life changes, so do your financial needs, including insurance coverage. You may need more or less, depending on your personal situation. The goal is you don’t want to pay for more than you need. As an example, if you had children in your 20s, they may be on their own sometime in your 40s, so you can reduce your life insurance policy.
Further, if you have accumulated assets, and especially if you earn income from those assets, you are potentially vulnerable if you become involved in a lawsuit. Therefore, consider purchasing an umbrella policy, which will help preserve your assets and future income if you are liable.
Updating your beneficiaries
All of the financial assets (retirement accounts, life insurance policies, etc.) you have earned and accumulated can be passed on to a beneficiary upon your death. Often, people name one or more individuals early and neglect to ever think about it again. Therefore, if you don’t update your beneficiaries, you could create a mess for your loved ones.
Updating your estate documents
An estate plan is not something you can just set and forget. Changes in your life and to the tax code can all upend your estate plan. By your 40s, you may realize leaving a legacy is important to you and want to open trust funds for your children. Or, for example, new tax laws could mean a higher tax burden for your heirs based on your current estate plan. Whenever one of these changes occurs, you want to revisit your estate plan to make sure it still aligns with your needs and wishes.
Hiring professional financial help
Ultimately, you should be saving and investing with clear goals in mind, namely how much and when you’ll need to reach financial independence. If you are uncertain where you stand, your 40s is the right time to get it together. Consider meeting with a financial professional who can help assess your current situation and determine what opportunities are available to you to achieve your goals.