By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
Compared to their parents, people in their 30s are:
- Managing much more student debt. In 2005, the average student loan balance was $16,651. By 2012, this average had grown to $24,803 (Source: Federal Reserve Bank of New York). Today, the average Class of 2016 graduate has $37,172 in student debt. That is $1.44 trillion across 44.2 million Americans with student debt.
- Getting married later. In 1970, the average age at marriage was 22.8 years for males and 20.3 years for females. By 2010 these ages had risen to 28.2 for males and 26.1 for females. (Source: U.S. Bureau of Census)
- Postponing child birth. Average age of first-time mothers was 21.4 years in 1970 and 26.4 years in 2014. (Centers of Disease Control and Prevention)
Many Americans in their 30s face a different set of issues today. They are older when they start having kids and more in debt than their parents. This creates financial planning challenges on a variety of fronts. The path to building personal financial security depends on juggling priorities and managing both short- and long-term goals.
An important first step for people in their 30s is acquiring a good enough job to cover debt and still save for retirement. It’s critical for many to continue to invest in their education and training to build life skills and talents that can lead to increasing earnings in the future.
Working couples should make sure that at least one of them – preferably both – has access to an employer retirement plan, preferably with matching contributions. People in their 30s have the great benefit of time on their side to improve the power of compounding returns on savings. The more they can save early in their working years, the less they need to save in later years.
It’s important to save at least 10% of pay in tax-deferred retirement accounts. This lowers current income taxes and creates a good habit of living on less.
People who aren’t covered by a retirement plan, should make annual IRA (or possibly Roth) contributions every year. Self-employed individuals should understand retirement savings options available and save as much as possible in a solo 401(k), Simplified Employee Pension (SEP) or SIMPLE-IRA.
With a potential investing time horizon of 50 years or more, it will likely be prudent to focus investments on growth by emphasizing a globally balanced mix of stocks.
In conjunction with establishing good savings habits, debt reduction is the next target for your earnings. Pay off the highest-interest student loans first. If you have extra savings from a bonus or raise, use that money to pay off loans faster.
After accounting for retirement savings and debt reduction, decide what your lifestyle budget can be. This budget should be dependent on future goals like saving enough for a home down payment and having children.
Owning a home allows you to potentially build equity and take advantage of long-term price appreciation. Most importantly, if you can get a fixed rate mortgage, it freezes your monthly payments for the life of the loan. Target 20% of the home cost as a down payment.
Because the investment time horizon is much shorter for money being saved for a down payment for a house, it should be invested less aggressively than retirement assets. Short-term bonds or cash equivalent investments are appropriate for any investment with a time horizon within a few years.
Finally, if funding a college education for children is important, saving in 529 college savings plans beginning when they are young is the best way to take advantage of both the power of tax-deferred growth and compounding so they will have a good start toward their college expenses.
Subscribe to our monthly newsletter for insights on money, markets, and personal finance.