Now that you’re in your 30s, your career is a bit more established and your personal life may be more complex if marriage and kids have entered the picture. You (hopefully) are no longer living paycheck-to-paycheck, but aren’t sure what to do with your extra cash. When you have kids, debt, and your retirement to fund, where is the best place to put your money to work? Someone keeps calling you about buying an annuity or whole life insurance policy. Should you listen to what they have to say?
As a general rule, it’s good to put 50% of your paycheck toward your necessities (including all types of insurance), 30% toward your wants (like cable, dining out, and travel) and 20% toward savings (including paying down debt).
You may be able to contribute to all the items listed below. However, if you have to prioritize where to invest your limited resources, review my comments on each item then decide what works best for you.
- Life Insurance – If someone is depending on your salary (i.e. kids, elderly parents, or spouse), consider buying term life insurance. It’s relatively cheap and you’re less likely to have health issues now that may prevent you from being insurable later. If you have kids, this is a must. At a minimum, have enough coverage to pay their expenses until age 18. Whole life policies or annuities tend to combine life insurance with investing and charge a high fee to do so. Instead, just buy term life insurance and invest the rest of your money on your own. (For related reading see: 7 Issues to Consider When Determining Life Insurance Coverage.)
- Disability Insurance – What would you do if you could no longer work? Could your spouse cover all the household expenses? Could someone else step in to help? If not, consider buying long-term disability insurance. It’s better to get some coverage outside of work, but if you can only get some through work that’s better than nothing. The reason it’s better to have coverage outside of work is if you develop a medical condition that makes it impossible to get insurance, then you leave your company, you will no longer be covered.
- Other Insurance – Try to bundle your car/renters/homeowners/umbrella insurance at one company to take advantage of reduced rates. Also, if you get married be sure to pass that information along to your insurance agent for possible lower premiums.
- Saving for a down payment on a house – This could be part of your “savings” but I’d rather you categorize it as a “want.” Cut back on some of your non-essential expenses to work toward your worthwhile goal of homeownership. Consider opening a separate savings account called something like “My First House” and have a certain amount of each paycheck automatically deposited into it. I recommend a savings account over an investment account because it has no chance of declining in value.
- 401(k) with company match – This is a no-brainer. Free money is free money. Contribute to your 401(k) at least up to the point you get your company match. Some companies give you an option to automatically increase your contribution each year. If your company offers this then sign up. You probably won’t notice any change to your paycheck, but it’ll have a huge impact on the size of your account on the day you retire.
- Pay off high-interest credit card debt – After contributing enough to your company retirement plan to get that free money, focus the rest of your savings allocation on paying off your debt as quickly as possible. Pay the minimum each month for all your cards except for the one that charges the highest interest rate. For that one, pay off as much as you can afford each month. Once that one is paid off, focus on paying off the card with the next highest rate. Continue this strategy until all credit cards are paid off.
- Student loan debt – Although I’m listing it here, this shouldn’t necessarily be your next highest priority. If you’ve got a low-interest loan it might make sense to make your monthly payments but not pay it off early. However, if you have a high-interest student loan pay it off as soon as possible. Remember, student loan debt is one of the few debts not forgiven when filing for bankruptcy. (A Note on Debt: The only new debt you should accumulate is a mortgage. Yes, this includes buying a car. If you don’t have the funds to buy a new car without a loan, it’s probably a car you can’t afford.)
- Roth IRA – Contributing now, while you’re likely in a lower tax bracket than you will be later in your career, allows you to grow your investments tax-free for a very long time. The longer you hold your Roth, the longer the power of compounding works in your favor. Also, as you get older you may make too much money to be allowed to contribute to a Roth. (2016 Roth contribution limit for those under 50 is $5,500.)
- 401(k) with no company match – If you’ve contributed as much as you can to your Roth IRA, then by all means continue to contribute to your company’s 401(k) until you reach your yearly contribution limit ($18,000 in 2016 for those under 50). It’s still a good deal since the taxes are deferred until you take the money out in retirement.
- 529 College Savings Plans for your kids’ college – Yes, this should be your lowest priority. Although it’s great if you have enough money to fund your kids’ college education, it has to take a back seat to funding your retirement. Your kids can get a loan to pay for college, but you can’t get a loan to pay for retirement.
Obviously, this is not a complete list of financial issues every 30-something faces, but they are some of the bigger ones that many people in this age bracket face.