In your 30s? Slow, steady wins the race
Your career is taking off. You just tied the knot—or plan to soon. And you're responsible enough now to appreciate the importance of putting part of your income aside for the future. Congratulations, you're 30.
The trick now is to avoid those all-too-common money missteps that could derail your long-term savings plan. That includes buying more house than you can afford, being overly conservative with your portfolio and, ironically, funneling too much too soon to your 401(k) plan.
"One area where young people make mistakes is they get excited about their 401(k) and they want to max it out," said Richard Salmen, a certified financial planner with GTRUST Financial Partners, noting the maximum tax-deferred contribution for 2014 is $17,500. "Then their car breaks down or their refrigerator breaks and they stop contributing altogether. I'm a much bigger proponent of starting out incrementally."
Indeed, when it comes to building a cushy nest egg, slow and steady wins the race.
Salmen said 30-somethings with an employer-sponsored 401(k) would be better served by contributing at least enough to get the employer match, which is on average 50 percent of up to 6 percent of their salary.
Then, each time you get a raise, funnel half of that newfound money into your 401(k) through direct deposit—so you're not tempted to spend it.
"The other half goes to your family budget, and in five or six years you'll be able to max out your 401(k) without feeling any pain," Salmen said.
Prepare for rain
Investors in their 30s should also save outside their 401(k) for future big-ticket expenditures, including a down payment on a house, so they're not tempted to tap their retirement savings for short-term needs, Salmen explained.
Don't forget, distributions from your 401(k) before age 59½ will generally incur an early withdrawal penalty of 10 percent, although exceptions do exist in the case of financial hardship. You can borrow from your plan without incurring a penalty and pay yourself back with interest, but that also denies those dollars the chance to deliver compounded returns. (Plus, you'll owe the borrowed amount back in full if you quit your job or get fired.)
A rainy day fund provides further insulation, helping investors keep their hands out of the cookie jar when emergencies crop up—and crop up they will, Salmen said.
The fund should consist of at least six months' worth of living expenses held in a liquid interest-bearing account, although you may need a year's worth of expenses saved or more if your income is less stable.
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Be wary, too, of buying more home than you can afford. Lenders are far more conservative in the wake of the housing crisis, but they still qualify borrowers with good credit ratings for more house than they should buy.
Generally speaking, mortgage payments should not exceed 28 percent of your monthly take-home pay, said Phil Cook, a certified financial planner with Cook and Associates.
Borrowers can spend slightly more in the current market to capitalize on low-interest rates and favorable housing prices if necessary, but stretch too far and you'll lack the disposable income necessary to adequately feather your nest egg.
"Societal pressure to keep up with the Joneses and the desire for instant gratification will have more of a negative impact on this generation."
"Societal pressure to keep up with the Joneses and the desire for instant gratification will have more of a negative impact on this generation, because they are faced with an economy that probably won't offer the same opportunities that previous generations had," said Cook, noting job opportunities remain tight and earnings potential is increasingly limited. "It will be very hard to 'grow' out of your extravagances and luxuries."
Couples who are purchasing their first home, with the intent of leveling up to a larger pad when their income allows—and their kids outnumber the bedrooms—might also consider an adjustable-rate mortgage (ARM) to minimize their payments, said Elliot Herman, a certified financial planner and certified public accountant with PRW Wealth Management.