When you're in your 20s, your life is really just getting started: you’ve worked hard to graduate from college and you’re looking to prove yourself in your first "grown-up" job. But you might still be years away from big milestones like buying a home and providing for a family. You probably aren't focused on all the twists and turns that life can throw at you the older you get.
For many of us, our 20s are about having fun and figuring out where we’re going with our lives, which can be exciting. Not that having a good time has to stop when you're in your 30s – quite the contrary. But when your 30s roll around, it's time to get a little more serious about your finances, build your career, and make a solid plan for your future.
My journey has been anything but easy in my 30s. I'm sharing my story with you as both a financial expert and just a girl trying to make my way through this crazy decade.
Budgeting and relationships
I started working in the financial industry when I was 29 after running a successful startup company, Hometown Cinema, right out of college. I already knew how to budget and was pretty particular with how my money was spent. You might even call me a bit compulsive when it came to knowing how much money I was spending each month on every expense. Being a master at budgeting proved to be one of my most valuable financial skills to date and has helped me through lots of life changes in my early 30s.
I ended up getting divorced and remarried before I was 35 years old. That's a lot for your budget to handle if you don't have it in check. The divorce devastated me financially, and I had to learn how to manage my money all over again as a single person. I set up all my bills on auto-pay, re-worked my budget, and came up with a new payoff plan for the credit card and auto loan debt I was responsible for.
I'm a fan of the snowball method: you make the minimum payments on all your credit cards and put every extra penny onto the card with the lowest balance until it’s paid off, then move on to the card with the next lowest debt. It took me a few years, but I eventually got my credit card debt all paid off, and now I focus on keeping my credit card debt in check.
All of this change in my 30s allowed me to reboot my budget and rethink how I was saving and spending money. As a financial planner, I know how important it is to have a robust emergency fund in place and to increase my retirement contributions. In my 20s I focused on having three months' worth of expenses saved for emergencies, and in my 30s I worked on bumping it up to six months' worth of expenses. Just last year I finally achieved saving six months of expenses in my high-yield savings account.
My husband and I have money dates each week to go over our weekly budget and our goals. Going over goals weekly may seem like a lot of time spent talking about goals, but think about how rapidly things change: You get a new job, your car breaks down, you want to take a fabulous trip around the holidays, friends are getting married, and so on. I've found that if we don't check in each week at the same time about our short-term and long-term goals, we tend to lose track of where we're headed, and our budget starts suffering.
Dealing with student loan debt
The Millennial generation is the largest demographic in history with 75.4 million people. Millennials, you stand to inherit the greatest wealth transfer from your parents, and also face financial issues that no other generation has seen. Millennials have witnessed the recession and near depression in 2008 and surging student loan debt near $1.35 trillion dollars. As a result, Millennials have delayed milestones like getting married, having kids, and buying a house.
I sit firmly on the cusp of Millennials and Gen X, and can sympathize with the pain of having high student loan debt. Even though student loan debt is traditionally considered "good debt" it's still a significant chunk of money that I'm responsible for paying. In my 20s, I was more relaxed when it came to analyzing my financial situation and goals. However, with so many life changes in my 30s, I had no choice but to roll up my sleeves and devise a solid payoff plan to pay my student loan debt off much faster than 20 years.
Reducing the interest rate on my outstanding student loans was one of the best decisions I’ve ever made. I was able to lower my interest rate from 6.5% to 3.5% by refinancing my student loan, which would save me a ton of money over the life of the loan. In total, I cut my interest from $39,759 to $20,075, a savings of almost $20,000. There are so many great refinancing options now for student loan debt that didn’t exist even a few years ago. Companies like Earnest specialize in helping you slash your student loan debt. With the lower interest rate, I’m able to continue making the same debt payment and pay off the loan in half the time.
Buying a house
Another type of debt that millennials face is mortgage debt and the rising costs of owning a home. Buying your first home sounds like an amazing milestone, and most times it can be. However, many Millennials still have a hard time getting a mortgage in their 20s because of student loan and credit card debt, so they put it off until their 30s. It’s important to understand how much house you can afford and the financial realities of owning a home that extend beyond the mortgage payment.
I didn’t have enough money for a down payment but was lucky enough to have parents who gifted the funds for one. Traditionally, you want to have enough for a 20% down payment, but at the time I was able to put only 10% down and still have a mortgage payment without private mortgage insurance (PMI). (PMI is normally required when you put down less than 20% as your down payment and is not tax-deductible.)
What I didn’t realize was that owning a house meant I needed to have a very strong emergency fund to pay for all the expenses. Within in the first two years, the plumbing ruptured and ended up costing over $20,000 to fix and all the windows needed to be replaced, which cost around $8,000. I certainly didn’t just have that kind of money lying around, so I had to refinance the mortgage and take cash out. As a result, my monthly mortgage payment went from $1,900 a month to $2,050.
When I first bought my home, I knew how important it was to also purchase a term life insurance policy that would cover the cost of my mortgage if something happened to me. I took out a 30-year mortgage and decided that it made sense to also get a 30-year term life insurance policy as well. The mortgage was only $300,000 (in Los Angeles that’s considered cheap, since the median house sales price is now around $700,000), but I decided on a $500,000 term life insurance policy because I had additional debts like student loans and credit cards that I wanted to make sure would be taken care of.
There are loads of extra costs that come along with owning a home including taxes, insurance, and the burden of fixing anything that breaks (because things will break). After a few years I decided that I was ready to have a landlord once again that I could call when the air conditioning broke. I decided to sell my home and rent an apartment while I built up my emergency fund and paid off debt.
In my 20s, the idea of retirement seemed very far off, but I knew how important it was to start saving early. I made a commitment to contribute up to the maximum amount in my 401(k) and take advantage of the matching funds that my company offered. I stayed at the company for four years and was 60% vested, meaning I could leave the company with 60% of the amount that they matched on top of 100% of the amount that I had contributed. As a result, I already had a nice nest egg accumulating value by the time I reached my 30s.
However, in my 30s I started my own business, and that meant I had to approach retirement savings in a different way. I set up a SEP IRA and committed to saving at least 15% of my net earnings each year. The contribution limits for a SEP IRA in 2016 are 25% of compensation or $53,000, whichever is lower. I no longer had the nice company match, so I had to be diligent about saving. I put all my retirement savings on auto-debit, so they automatically were transferred over without me having to touch the money.
If you’re just starting up your business and aren’t sure what direction to take with your retirement savings, two other options are an IRA or Roth IRA. In 2016, you can only contribute up to $5,500 if you’re under 50. Although these contribution limits are lower than the SEP IRA, setting up an IRA or Roth IRA is a start in the right direction to build your retirement savings.
Being a business owner, I also knew that I wanted to increase the life insurance policies that my husband and I had so that we could have enough money for the other person to live comfortably well into retirement should something unexpected happen to one of us. While we were at it, we also decided to update the executor on each of our wills (as a couple you should each have your own will). These aren't fun decisions to make, but they are decisions that would protect our assets and were essential to tackle in our mid-30s.
I certainly didn't think my 30s would take as many turns as it did, but being smart about my money really helped me during these years. Whether you are getting married, launching a business, going through a divorce, or starting a family, sound financial planning will carry you a long way. My best advice for someone approaching their 30s is to start saving as early as you can and focus on paying down your debt so you can ready for whatever comes in the next decade.