Your 20s are the time when you should focus on getting an education, starting your career, and generally making the transition to adulthood. Once you reach your 30s, it's time to get serious about setting yourself up for a bright financial future.
With that in mind, there are some moves that are important to make while you're still young. Here's why your 30s are the perfect time to boost your retirement savings, establish college savings accounts for your kids, and stop paying credit card interest once and for all.
1. Boost your retirement savings
Many retirement plans auto-enroll participants at a very low contribution rate -- 2% or 3% is quite common. Lots of 20-somethings just leave this low rate alone, while others do contribute more, but just enough to take advantage of their employer's matching program. And unfortunately, some choose to opt out of their employer's plan altogether.
Most financial planners (myself included) suggest a target retirement savings rate of 10% of your compensation -- not including any contributions your employer makes on your behalf.
You don't need to get there right away, but if your contribution rate isn't quite where it should be, 10% is a good goal to aim for. One popular strategy is to increase your 401(k) contributions by one percentage point each year until you reach your target. In other words, if you're contributing 4% of your salary this year, increase it to 5% next year, 6% the following year, and so on. You'll hardly notice the slight increase, and it can make a big difference over the long run.
2. Start saving for your kids' education
This may not seem to be terribly important, especially if you have young children. Many of my friends are surprised to learn that I've been aggressively setting money aside for my kids' college funds when my oldest child isn't quite four years old yet.
However, once you have kids, there's no such thing as "too early" to start saving. In fact, the earlier you start, the more value you'll get for your money.
For example, based on an annualized return of 7%, a $1,000 investment when your child is 10 could grow to $1,718 by the time they're 18. The same investment made when they're five years old would grow to $2,410 at this rate. And, if you set aside $1,000 when your child is a newborn, it could grow to $3,380. In other words, your earlier investments have far more compounding power than later ones. Even if your kids aren't little anymore, there's still no better time to start than now.
To maximize the power of your college savings, consider a college-specific investment vehicle like a 529 savings plan. Contributions to a 529 might qualify for a state tax deduction, and your investments grow and compound on a tax-deferred basis while in the plan. And withdrawals you make for qualifying education expenses are 100% tax-free.
3. Get out of credit card debt
The average American adult owes $6,814 on credit cards. Based on an average credit card interest rate of about 17%, this translates to $1,158 in interest per year just for the privilege of owing money.
Here's one important point to remember. A well-balanced 401(k) can be expected to generate annualized returns of 7% to 8% over time, and even great investors can only hope to consistently achieve returns in the ballpark of 12%. So if you're investing money while you still have high-interest credit card debt, you're actually setting yourself up to lose money. In other words, making 8% on your investments but paying 17% to your creditors isn't exactly a recipe for financial prosperity.
So, one of the most important things you should do in your 30s, if you want to improve your financial health, is to get out of credit card debt once and for all -- even if it means saving and investing a little less while you do it.
Just a starting point
Obviously, these are just some of the many moves you can make in your 30s to set yourself up for financial health, but they are certainly some of the most important. If you get these three things right, your 40s, 50s, and beyond will be far brighter than they otherwise would have been.