When you hit your 30s, chances are you’ve finally hit your stride in your career and have some earning power. If you’ve been responsible, your 401(k) is probably maxed out each year, maybe you own a nice home, and you’re on pace for a comfortable retirement.
But there’s always more you can do to step up your money game.
Business Insider spoke with Jared Snider, a s
enior wealth adviser with Exencial Wealth Advisors in Oklahoma City, to find the financial strategies you can employ in your 30s to ensure your financial success endures for a lifetime.
1. Don’t be too cautious
“A lot of times folks who are in their 30s, it’s easy to get risk averse,” Snider said. “They get nervous about what’s happening with whatever the news of the day is and move out of the markets. “
If you’ve already achieved some financial milestones by your 30s and earn a strong income, you may be tempted to build a moat around your savings and pare down your risk. But at this age — still decades away from traditional retirement — fleeing the stock market would likely cost you tremendous financial gains, according to Snider.
“When you’re in your 30s, you still have a long flight path … so you still have quite a bit of time to take measured risks, at least when it comes to markets, to be able to build your portfolio and have more growth,” Snider said. “Don’t throw caution to the wind, but don’t be too cautious to the point where it hurts your ability to build wealth over time.”
2. Diversify tax treatments, not just asset classes
Financially savvy people know you don’t want to invest everything you’ve got in Google stock, even if it is a once-in-a-generation company. You want exposure to a wide array of investments.
But that’s not the only way you should be diversifying your portfolio, according to Snider.
“When you say the word diversification, people think of stocks versus bonds or large caps versus small caps, but another concept in my mind when it comes to diversification is tax diversification,” Snider said. “If you can diversify the tax treatment of your assets over time it can benefit you so you have more tax flexibility when you hit retirement.”
If you only build your nest egg in tax-deferred accounts like a 401(k) or IRA, you’re going to pay a lot of taxes in retirement when you access these funds — meaning your retirement dollars may not go as far as you’d hoped.
Snider suggests investing in a Roth IRA as well. Unlike a traditional IRA, you contribute to a Roth using money from your take-home paycheck that’s already been taxed, but the upside is you won’t pay any taxes as that money grows or when you withdraw it later in life.
If you make too much money to contribute to a Roth — over $194,000 in modified adjusted gross income as a couple or $132,000 as an individual — you’ve still got options. Open up an investment brokerage account and buy some low-cost ETFs or index funds. Let that money sit for a while and you’ll most likely pay no more than 15% in taxes on its growth, as the long-term capital gains tax for most people is far lower than taxes on regular income.
Moreover, a brokerage account is a great option if you aim to retire early, since you’ll face no penalty for withdrawing before age 59.5 like you do with most retirement accounts.
3. Don’t let your lifestyle outpace your earnings
So you get a big raise and now you’re making well into six figures. Life is good. You can probably afford some upgrades, but don’t get carried away. Are you going to really use all five bedrooms in that new house? Is a Maserati really going to provide you much additional happiness?
If you can swing it, great, but don’t let these lifestyle temptations come at the cost of a happier retirement, cautions Snider.
“If someone is in their 30s and they have a lot of earning power, but they have continued to ratchet up their lifestyle to match their earnings, they may have a fantastic lifestyle now, but they need to ask themselves, are they doing the things they need to be doing so that they can retire on the timeframe they want to,” Snider said.
4. Get a head start on late-life healthcare expenses
Most people in their 30s are still relatively healthy and less likely to incur a deluge of health expenses. You can take advantage of this by enrolling in a high-deductible healthcare plan where you’re eligible to use a Health Savings Account (HSA) — an investment vehicle where you can park thousands of pre-tax dollars every year ($3,350 for individuals and $6,750 for families).
Unlike a Flexible Savings Account, HSAs don’t expire. Moreover, you can invest the money in the markets, and you won’t pay any taxes on the growth or when you access the funds, provided you use them on qualified health-related expenses.
“By the time you reach retirement or you reach an older age where perhaps you’ll be consuming more healthcare, you’ve got dollars specifically allocated for that purpose,” Snider said.
Given its uniquely powerful tax advantages, the HSA is a “fantastic way to start hedging against healthcare risks down the road.”
5. Don’t succumb to unforced errors
The markets are unpredictable, and your portfolio may wind up taking a hit one day by no fault of your own. Focus on what you can control, and don’t get complacent and make unforced errors.
Snider says he commonly sees people in their 30s make obvious mistakes, like avoiding the markets and letting money sit in low-return investments or becoming preoccupied with trying to time the markets (which rarely works out well).
Another mistake is investing in the same industry where you work. If you’re an engineer at Apple, don’t buy loads of stock in Microsoft, Facebook, and other tech stalwarts. If you work at Bank of America, dial down your exposure to Wells Fargo, JPMorgan, and other financial institutions.
“They fall in love with whatever their industry is. They’re comfortable with what their industry is and they want to invest in areas that are in that particular industry,” Snider said. “Whenever your human capital is tied up in one particular industry, it may make sense to diversify your investment capital outside of that industry, just because of the amount of risk associated with that.”