When you reach your 30s or 40s, it is time to put youth aside and start financial planning, if you haven’t already. Your future and your family’s future need to be planned for and protected. There are two particular issues that most people in Generation X and the Millennial Generation are faced with: saving for your children’s college tuition and retirement. Here are a few financial tips.
Save, save, save!
The very first step to financial planning, obviously, is to start putting money aside. Establish an emergency fund for those unexpected expenses that can often wipe us out. It is typically recommended that you set aside at least 3-6 months of your income. Married couples may be alright with only three months of their combined income, however, a single person will probably need a six-month reserve. Additionally, it is great to also set aside money for planned expenses (such as capital improvements or home repairs). At the very least, this emergency fund is there in case you lose your job or you are faced with a large unexpected expense.
Pay off or reduce your debt
Credit cards, student loans, and medical bills, should be your next priority. These debts should be reduced, with an eye toward eventually eliminating them altogether. That way, your income can be funneled into savings and investments. In the meantime, check to see whether you can lower your interest rates on your credit cards or other loans, which can save you money as well. It’s best to pay additional principal towards those debts that have the highest rates first, to minimize the amount of interest you are paying on your overall debt.
Make the most of your employee benefits
By the time you are in your 30s or 40s, you should be maximizing contributions to your 401(k) or other retirement plan to the extent your employer will match your contributions. That way, even if your investment isn’t making much of a profit, your employer is adding to your retirement account (and it’s FREE MONEY). And it’s hard to ignore the benefit of compounding interest – the growth can be astronomical. Determine from your employer what your maximum contribution and maximum employer match can be, as each retirement plan may be different. You may be able to contribute more than you thought; in 2015, an employee can contribute up to $18,000 in a tax-deferred 401(k).
Establish your own retirement plan
In addition to your employer-sponsored retirement benefits, you should also make the maximum contributions allowed to a traditional IRA or Roth IRA, depending on your income. Traditional IRA contributions are not limited by income, but Roth IRAs are only available to married couples with an adjusted gross income of up to $183,000 and single filers with an adjusted gross income up to $116,000 in 2015. If you are under 50 years of age, the maximum contribution to any IRA is currently $5,500 each year. You will pay taxes now on your contributions to a Roth IRA, but you will avoid taxes later on.
Obtain insurance for your family
The importance of insurance cannot be overlooked. For people in their 30s and 40s, life insurance is often important for the family you leave behind, especially young children. It is often very difficult for one spouse to continue providing for the family without life insurance if the other spouse passes away. The good news is, term life insurance for a healthy person in their 30s or 40s is not that expensive. Another good option to consider is disability insurance.
If you have questions regarding financial planning, or any other estate planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.
Gerald M. Dorn, Estate Planning Attorney
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