In your 30s or 40s? What you need to know about managing money.
Changing your financial state requires a kind of time travel to commune with your future self.聽 Where do you want to be in 10, 20 years? Are you on the right path, or heading in the wrong direction?
The time value of money鈥攖hat is, how savings, investments and debt levels compound with the passing of years鈥攎eans that money habits, good or bad, created when we start to earn cash echo into the decades that follow. And a whispered bit of wisdom up front can keep you from howling over your mistakes later in life.
We polled our NerdWallet network of聽聽certified financial planners about the greatest regrets and lessons you should learn in your 30s and 40s.聽Taken together, these could be considered 12 steps toward securing your financial future. And they all hinge on two keys skills we must learn鈥攁nd often relearn鈥攊n our money lives: prepare and stick to a budget, and establish good savings habits.
Your 30s
Regret is a great fulcrum for change. By the time you reach your 30s, your attitudes toward cash (hopefully) have matured, tempered by past mistakes and informed by new responsibilities.
鈥淧eople in their 30s are approaching that time in their life where they will have many life milestones: marriage, children and a new home,鈥� says聽, principal of Maclendon Wealth Management in Delray Beach, Florida. 鈥淏y this time, you should have paid down (or paid off) student debts, settled into your career, and are probably thinking about starting a family. Hopefully the financial habits you set in your 20s will provide you with the knowledge of what you can save and afford to do.鈥�
Still, the lure of easy credit that an established career brings can set up pitfalls, especially if you judge yourself against more-well-heeled friends and family. 鈥淧erception is not necessarily reality. Nice clothes, expensive cars and homes are not what they are cracked up to be, and are more of a liability than an asset,鈥� says聽, senior financial analyst and advisor for SkyOak Financial in Medford, Oregon.
鈥淎void the 鈥榞otta鈥檚鈥擨聽gotta聽have this, I聽gotta聽have that, I聽gotta聽have it now,鈥� adds聽, president of GFS & Association in Las Vegas. 鈥淐redit is easy to get and easy to abuse. Live within your means.鈥�
Tying the financial knot
The bigger problem in marriages is not incompatibility or infidelity, but rather聽. Know your partner鈥檚 money personality and find the middle ground鈥攆ast.
The good news: A recent study found that聽聽than older couples.
鈥淒iscover your partner鈥檚 money personality before you get married, and go through counseling if necessary. This alone can help minimize arguments of money, establish mutual expectations for using your money and create a shared vision or purpose for the future,鈥澛�, a financial advisor with Focus YOU in Foster City, California, says.聽鈥淥nce married, have a monthly big-picture review of your finances so you can monitor your progress toward your goals and make adjustments as necessary.鈥�
Childproof your finances
There鈥檚 no greater joy than having a child鈥攁nd no greater challenge to your finances. 鈥淐hild care expenses alone could add over $10,000 a year on average to your expenses for the first few years,鈥� says聽聽of Next-Gen Financial.
If budgeting and savings haven鈥檛 been a part of your life, having a kid will kick-start that habit (and leave you kicking yourself for not starting sooner). Child care is costly, and college bills are not so far away.
鈥淚f not by now, the habit of saving can be expanded to include other priorities you may have,鈥澛犔谴谔爏ays. 鈥淭hat emergency fund from your 20s? Keep it full, too.鈥�
Rent or buy?
The largest purchase most people make is of a home. Although down payments may vary, advisors suggest having at least 20 percent 聽saved for a down payment to determine 鈥渉ow much home鈥� you can afford.
But should you buy? The lure of building equity versus the expediency of renting comes down to one thing, really: How long do you think you鈥檒l stay put?
鈥淚f your job has you moving or changing income a lot, best rent,鈥� Frank says. 鈥淏uying high and selling before you can profit is how you lose your shirt.鈥�
If you do decide to buy, 鈥渘egotiate hard to get a great mortgage,鈥� says聽, a certified financial planner based in Leesburg, Virginia. If your career has you moving before you planned, 鈥測ou could keep [the house] and rent [it] out, creating an investment asset.鈥� But that can be a slippery slope if you鈥檙e not prepared for the added responsibilities of managing two homes in two locations.
Compound interest鈥攖he eighth wonder of the world
Be it your 401(k) retirement account, 529 accounts for your child鈥檚 education, life insurance or other investments, compound interest is a magical thing. This is the time to sprinkle that fairy dust in your financial life.
鈥淎s we all know, compounding is the eighth wonder of the world,鈥� Seasholtz says.聽鈥淭ime and even a small amount of money adds up over the years;聽I still have my investment I began when I was 26 years old.鈥�
鈥淚f your employer offers a retirement plan, participate, even if it just seems like a drop in the bucket,鈥� Houchins-Witt adds. 鈥淭he drops will eventually fill the bucket.鈥�
Your 40s
If you were careless with your cash but didn鈥檛 have any regrets before, you certainly do now. That鈥檚 OK.
鈥淟ife happens,鈥� Pitney says.
Don鈥檛 go into greater debt as a way to jumpstart investing. 鈥淔or 40s, realize that debt service depletes usable money in a family鈥檚 after-tax, lifetime income pool,鈥� says聽聽principal at KumQuat Wealth in Chattanooga, Tennessee. 鈥淒on鈥檛 think investments will necessarily outperform debt service, particularly unsecured credit.鈥�
鈥淩ealize that the science of happiness informs us that it isn鈥檛 about things but is about relationships and experiences,鈥� he adds. 鈥淔ocus on these instead of bigger, better, more.鈥�
Breaking up is hard to do
As about half of marriages end in divorce, it鈥檚 important to聽. Some couples are able to amicably separate their assets, agree on alimony and leave each person鈥檚 credit rating in tact. For others, that is easier said than done.
鈥淒ivorce is not fun. Its not going to be an easy thing, so don鈥檛 kid yourself,鈥� Hedstrom says. 鈥淚t can get nasty. Protect yourself, use experts and make sure you always maintain your independence.鈥� This includes knowing all of your and your spouse鈥檚 outstanding debts, account balances, and bills and due dates.
Ultimately, Sewell advises, 鈥�both聽spouses should understand the money!鈥�
Ramp up your retirement accounts
Put your 401(k) into overdrive. If you aren鈥檛 already doing full employer contributions, do it. It might also be time to tip the savings balance from your kid鈥檚 education to your retirement. Your kids can get low-interest loans for college; there鈥檚 no low-interest loan for retirement.
鈥淚f you are behind on your retirement planning because of your [own] student loans, then your 40s are the perfect time to kick-start the retirement plan rather than boosting the education fund [for your child],鈥� McLay says. Adds Houchins-Witt: 鈥淎s your income increases, increase your retirement savings. You won鈥檛 notice it as much if you increase your contributions each time you get a raise.鈥�
And continue to build upon the foundation you set in your 20s. 鈥淭hat emergency fund? Keep it still鈥攜ou鈥檒l have to have that until you retire鈥攁nd yup, it will become the first dollars you can spend once you retire,鈥� Frank says. 鈥淩etirement sounds like a long ways away, right? Graduating high school or college was just yesterday, wasn鈥檛 it?! In the blink of an eye, here鈥檚 the grandkids!鈥�
Insurance matters
Now that you have people counting on you, it鈥檚 time to plan for the worst. Life insurance matters.
There are聽: term life insurance, which covers a specific length of time (say, 10 or 20 years), and permanent (or whole) life insurance, which continues for as long as you live. Premiums for term policies are cheaper because the insurance lasts only a limited time, whereas those for permanent policies are more expensive largely because they provide guaranteed cash value for your beneficiaries.
鈥淭erm insurance is pure insurance, while permanent insurance is part insurance and part investment (with many moving parts, and a much higher cost),鈥� says聽, owner of Topel & DiStasi Wealth Management in Berkley, California. 鈥淭erm life insurance is like renting, and permanent life insurance is like owning. And, while we would all love to be owners versus renters, until you have significant assets and incomes, renting often makes the most sense.鈥�
, owner of CF Services Group in Gaithersburg, Maryland, notes: 鈥淪ome term insurance policies are convertible. This means that they can be exchanged for permanent policies during the initial term period in the same underwriting class, with no medical questions. Since you cannot be certain that your health will still be good in 10 or 20 years when you are more financially solvent, this is a very important feature.鈥�
It鈥檚 not too late
So maybe you鈥檙e deep in credit card debt, you have no life insurance and saving for retirement feels like a fantasy. Here鈥檚 the thing: You still have two or three decades of working life ahead. It鈥檚 never too late to start.
鈥淢eeting with a professional planner is perhaps the most important thing you can do to begin preparing yourself for life鈥檚 largest expenses: 20 to 30 years or more of retirement and paying for a college education,鈥� Pitney says. 鈥淢any life events seem to derail plans, but minor changes in your 40s can have significant payoffs down the road.鈥�
