In investing, timing is of utmost importance and the earlier you start in your journey, the better results you will get in the end. You’ll have compound interest as your friend because it will help your money grow exponentially. This means that if you start investing in your 30s, as opposed to starting later in life, you can grow your savings many times over the amount you began with. So, come your retirement day, you’ll see that the few hundred dollars that you invested at age 30 are now a significantly valuable asset for you.
If you are in your 30s now and are serious about starting your investing journey, here are a few pointers for you.
Set Long Term Goals
One way to start on the right foot is to look at your present circumstances and then set your eyes on what you want to happen in the future.
The first thing to settle is your attitude towards being in the game for a long time. If you don’t see yourself enjoying just holding on in an investment for a long time, then you should reconsider. You want to find investments that will provide value as time goes on so don’t even entertain those dubious “get rich quick” investment offers.
You should ask these questions:
- Where do you want to be 5 years from now? What about 20 years from now?
- What income do you expect to have over time?
- How long do you plan to invest?
- How much do you expect in contributions over time?
- Looking at your long-term goals and your current finances, what investment options are optimum to get your investment journey off the ground?
- Once you’re online in your investment journey, how should you adjust your investments over time so that you don’t stray off-track from your goals?
Investing can help you position your funds to grow more consistently and help you reach your goals. Maybe you’re thinking of retiring at 60, buy a new home in the next 10 years, or just take a sabbatical mid-career to pursue a long-time dream. Whatever it is, you’ll want to time your investments so that it matches your needs later. This means that you can access the money you’ve invested at the time you will need it – without sacrificing returns.
As a young investor, it’s but typical that you will find yourself in a low tax bracket and you may be unfamiliar with tax strategies. This is a good time to learn because you will have a longer time to take advantage of the tax statutes.
You can begin with the tax deferral that the traditional 401(k) provides or the tax-free status of the Roth 401(k). Although the Roth does not offer an outright deduction on contributions the way the traditional 401(k) does, experts advise young investors to put at least half their 401(k) contributions into Roth accounts just the same. Because over time, the tax-free withdrawals will become more valuable than tax-deductible contributions when an investor has years to let the investment grow.
Another important thing to consider is where to invest. It’s better to put your tax-inefficient instruments such as bonds and anything that pays out a lot of distributions in your tax-deferred account. This is to allow them to work for your over 20-30 years. If you put them in a taxable account, you’ll be sharing your returns with the IRS – that’s as high as 20% to 30% each year. On the other end, put your tax-efficient investments in your taxable account.
Consider Automating Your Investments
Let’s say you don’t want to put all your eggs in one basket but splitting your money into several baskets might seem like a complicated process. In truth, it’s very easy and with the technology available around, you can just simply automate everything.
Set up an automatic transfer so that once you fill your first bucket, you can seamlessly move money from your checking account directly into your investment accounts. This will happen automatically so you won’t have to remind yourself to transfer the money – you simply set it and forget it. The good thing is, you can do this online or set it up with your local bank branch.
Some investing platforms can help you automate your investments by letting you pull directly from your bank account. All you need to do is set the amount and the frequency that fits your requirements and the app will do the rest. Another good idea is to set up an automatic system that pulls funds from your paycheck so you take care of your savings even before you get the chance to spend it.
Maximize Your Retirement Savings
For the year 2019, the IRS has set a cap of $19,000 to contributions for a 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan. More than ever now is the best time to spread out your contributions so you can maximize the advantage of your employer-sponsored retirement plan savings. And contribute enough so you can fully avail of any employer-match.
As an investor in your 30s, time is on your side such that even if you suffer some market losses now and then, you can still make up for them. When you’re young, you have all the opportunity to take calculated chances. For this purpose, you can turn to a target-date fund to diversify your portfolio and time it according to your intended retirement year.
For example, a 35-year old may consider a 2050 target date fund which will likely invest heavily in stocks and mutual funds. They are generally more volatile, unpredictable and aggressive, but they also contain bonds so that they diversify the portfolio. Your target year is an estimate of when you want to retire.
Paying off High-Interest Debt
his may not sound like a traditional investment strategy advice but it’s a good idea to have a plan so that you are debt-free in your 30s. What would you think will be to your financial advantage: using your money to earn a 7 percent annual return or avoiding a credit card debt that costs you 15 percent (or more) in accrued interest? Although it does not mean you should start investing only when you’re free from all debts.
In fact, you can still keep some of them as long as the low interests don’t burden you financially. The idea is to work on removing all high-interest rate debts off your list before focusing on other investments.
Don’t Afraid Yo Be Aggressive
At the opposite end of taking so much risk (such as putting everything in individual stocks) is to be super conservative in investing. Keeping all your funds in low-risk instruments like Certificates of Deposit or money market account is not the best way to make your money grow.
There is no doubt that these instruments will let you sleep soundly at night but they have a very low return on investment. In fact, the returns won’t even let you keep up with inflation – that’s how little you can get from them. Eventually, you’ll end up losing money over time because you won’t be able to make use of your returns to pay for your expenses and might force you to use your investment money later for these expenses.
If you just invest 20% of your monthly income will already build up your wealth wantonly. Ask the bank to automatically take the amount from your paycheck and transfer it directly to your investment accounts. It helps you build up the discipline to save and invest.
Diversify Your Eggs
There is a guaranteed way to protect your investments against the ups and downs in the market. Just make sure that you spread your money in different types of investment. A good portfolio should include bonds and stocks. The stocks should be a mix of big and small companies and preferably companies in the United States and in other advanced countries around the world. The fastest way to create this mix is by investing in a mutual fund which will allow you to own a small fragment of many well-picked stocks and/or bonds simultaneously.
- You want diverse asset types. Your portfolio should contain a mix of assets – we’re talking about stocks, corporate bonds, government bonds, real estate, etc.
- You want to invest in diverse sectors. You want to spread out your investments to cover various industries and markets. If you tilt your money heavily into real estate and the real estate market suffers another catastrophic hit, you may lose everything.
- You want to diversify geographically. What you want to do is put money all over the globe. If you focus on one market such as the United States and a political turmoil negatively affects its economy, you will likewise suffer. Even if your money is in stocks, bonds and real estate but all of them are based in the US, their values will go down simultaneously.
You can enlist the help of a financial planner to find the right asset combination that fits your profile that considers your age, goals and risk tolerance. Or you can use an online calculator (like the one from Vanguard) to get an intelligent estimate. If you plan on not involving yourself heavily in the selection and trading process, turn to a target-date fund. It will automatically allocate your investments for you and modify it in tune with your investing timeline.
Take Advantage Of Your Employee Benefits
If you work with a large company, you may want to check how they can help you make investing a bit easier and more efficient. The bigger the company, the more opportunities it can provide to employees to make investing more convenient such as automatic payroll deductions, inclusions of employees in tax benefits and discounts, or access to broker services. You may be lucky enough to work for a company that can help you buy stocks at below-market prices.
The most helpful benefit your employer can give is a retirement savings plan such as a 401(k) plan where you can make contributions and avail of some tax savings while you contribute. And when the money is in your account, you can take advantage of compound interest to make it grow over time without taxation. If your company matches your contributions, you should aim to give the maximum or try to work towards that amount.
In case you can’t enroll in a 401(k), or you’re already getting your employer’s match, check if your income can allow you to open a Roth IRA. It’s different for a traditional IRA or a 401(k) because it won’t give you a tax break on your contributions. However, it has something better in the future for you: you won’t have to pay federal taxes when you take out your money in retirement. This means that your contributions and investment earnings build up tax-free.
If you’re self-employed, you should also establish and use your own retirement plan. While you’re at it, take the time to learn what investment options are available for you, then take advantage of them.
Consider Roth IRA
Even if you’re already participating in a workplace retirement plan, it’s still okay to contribute to Roth IRA as long as your household income hasn’t gone over the annual limits. The current 2019 tax code provides that you can contribute the maximum $6,000 to a Roth IRA if you’re married, filing jointly, and your household income is under $193,000. If you’re single, you can contribute the maximum if your annual income is below $122,000. Although you can’t claim a tax deduction on your contributions, your money will grow tax-free, including gains on your stocks, after five years have gone since you made your first contribution.
If you are already investing in a workplace retirement plan but still want a tax break on your contributions upfront, the tax code allows you to invest in 2019 a maximum of $6,000 in a traditional IRA and deduct the same later from your tax return. This is okay as long as your household income is below $103,000 (for married filing jointly) or if you’re single, $64,000.