In the Shondaland series Financially Fearless, we’re getting candid about how money impacts everyone’s lives. Our solutions will detail how to boost your financial wellbeing, trim overspending, craft a budget, and discuss money matters with loved ones.
Everyone is in a different place when it comes to finances. Some people are savers; some are spenders. Some have families who help them through college, allowing them to enter adulthood debt-free, while others must take on student loans that end up being a part of their financial situation for years to come. Salaries vary, as can costs of living, the number of kids someone has to care for, and beyond.
You do your best to be smart with your money, trying to resist the urge to grab takeout versus cooking at home, price comparing for the best deal online, and putting money away when you can. But have you ever wondered if there is an ideal financial position you could be aiming for? Whether you’re just starting out in your career or heading to retirement, what steps can you be taking in order to hit those goals? And how can you ensure that you’re on the right path to being able to leave the workforce one day? There’s a lot to address, so we asked some trusted, well-informed financial guides to help us parse through it all.
Financial goals to strive for
When it comes to accumulating money and assets, everyone is at a different stage, but there are a few benchmarks that experts say to aim for.
While stressing that everyone’s financial situations are entirely different, Justin McCurdy, a certified financial planner and executive director and financial adviser at global strategic investment firm Manhattan West, offers a different way to look at money goals. He says that your 20s is the time when you generally want to aim to keep six months of total expenses saved for an emergency fund. “This will provide short-term financial security to keep you afloat during a rainy day,” he explains. In your 30s, he recommends trying to contribute 15 percent of your monthly income to your retirement savings and investment accounts, while maintaining the emergency fund you started in your 20s. “In your 40s, continue the best practices learned in your 20s and 30s, but also try and set aside six months’ worth of mortgage payments,” says McCurdy. As you get closer to retirement in your 50s, he suggests focusing on making the maximum annual contribution to your retirement savings accounts. And in your 60s, McCurdy says to try and reduce your monthly spending by 15 percent in order to set yourself up for a stress-free retirement.
Now that you have somewhat of an idea of some financial goals to aim for, here are some expert-backed tips on how to get there.
Your 20s
For many people, the 20s are the time in their life when they are starting their professional lives and possibly a new career. “Their earning potential may be somewhat limited, which might make it seem difficult to build net worth during this decade,” says Paul Deer, a certified financial planner and vice president of advisory service at Personal Capital, a digital wealth management firm. The key here is to establish good financial habits and disciplines that will help you build net worth over the rest of your life, explains Deer, such as setting aside a certain percentage of pay each month to save and invest.
Another good money habit for this decade is to start tracking your monthly expenses and putting yourself on a budget. After you’ve paid all your bills, allocate a certain amount toward savings, then give yourself a budget of what you can spend each month on travel, entertainment, eating out, and fun. Deer also suggests using your 20s to start building credit. “This means taking on ‘good’ debt wherever possible, like buying a car and consistently making payments,” he explains. “Carrying good debt signals to creditors that you’re a responsible credit user.”
Many companies have 401(k) matching benefits, which means your employer will match a certain percentage of what you contribute to your 401(k). Amazon, for instance, says that for every $1 of employee contribution (up to 4 percent of their eligible pay), the company will contribute $0.50 to an employee’s account in the form of matching contributions. Your 20s are the time to start taking advantage of this. “This is free money, but roughly a quarter of employees are leaving free money on the table by not taking advantage of their match,” says Kendall Clayborne, a certified financial planner at SoFi, a personal finance company. “We see this happen much more frequently with younger workers who are not earning as much, so we urge members in their 20s to establish good habits early on and get that match.”
McCurdy adds, “Many Americans enter their 20s with large amounts of student loan debt, which can add stress to one’s balance sheet.” Taking steps toward chipping away at debt in your 20s, he says, can be a great first step toward financial freedom. Try setting up autopay to help you stay consistent and disciplined. “Excess savings should be put toward an interest-bearing investment account, which will expose you to the power of compounding while also enhancing your financial literacy,” he adds.
Your 30s
One of the keys to building net worth during this life stage is continuing to prioritize saving and investing. Deer says it can be easy for higher earnings to get swallowed up in mortgage and car payments, child-rearing expenses, and splurging on a few luxuries like nice vacations and fancy dinners. “Instead, it’s important to maintain the saving and investing disciplines that were established in the previous decade and even increase the percentage of income saved, if possible,” he explains. So, as your salary increases, avoid overspending on things like your mortgage or car payment. Clayborne adds that, if possible, you should try to continue to save aggressively for retirement in this phase of life, aiming to put away 15 percent to 20 percent of your earnings.
Deer also says this decade is a good time to refine your long-term goals and objectives and ask yourself: “What are my primary priorities? Do I want to retire early, or live more for today? What will it take to do that?” You may also want to consider working with a financial planner, if you haven’t already, who can help you plan for your goals. And if you’re settling into the swing of life with a family, consider establishing an estate plan. “Life throws surprises at us, so it’s best to be prepared for the sake of your loved ones,” says Deer. If you have children, he suggests starting to take a look at what you’d need to save to help pay for some of their higher education. “Consider special tax-advantaged plans like 529s [tax-advantaged accounts that can be used to pay educational expenses] if you do need to start saving for college,” he says.
And check in with your retirement plans. “As you change jobs, you should pay attention to your old retirement plans,” says Clayborne. “Many members we work with have multiple 401(k)’s at their old employers, and they do not pay attention to the fees or investment strategy.” She suggests familiarizing yourself with your options and considering rolling over your old 401(k)’s to your current plan or an IRA depending on the fees and investment options available.
Your 40s
Growing financial responsibilities can make building net worth especially challenging during the 40s. But one way to meet the challenge is to avoid falling into the trap of what Deer refers to as “lifestyle creep.” “As income grows, some 40-somethings are tempted to try to keep up with the Joneses by moving into a bigger home, joining a country club, driving exotic cars, or going on expensive vacations,” he says. It’s okay to enjoy the fruits of your labor, but keeping expenditures like these in check will go a long way, he says, toward building net worth during this life stage.
This is when you want to start acquiring assets, or financial holdings that can diversify your investment portfolio while growing your net worth. “Now that you’ve spent your 20s reducing or eliminating debt, and your 30s saving and accumulating wealth, you should be uniquely positioned to receive favorable real estate financing and participate in a wider range of risk-appropriate investment opportunities,” says McCurdy.
“Depending on how your financial plan is progressing, perhaps you’ve got flexibility to buy a vacation home. Not sure? Re-review your long-term plan, and potentially talk to a professional about how much flexibility you have to pursue secondary priorities,” says Deer. As your children grow, this is a great time to begin teaching them the value of a dollar by giving them an allowance.
Your 50s
Entering your 50s marks the beginning of the stretch run toward retirement for many people, says Deer. “The time window for building net worth during the wealth-accumulation stage of their life is starting to shrink as retirement draws closer,” he explains. Given the now-shrinking window before retirement, the most important net worth-building step for many people in their 50s and 60s, says Deer, is to max out their retirement accounts. “It’s also critical to start paying down outstanding debt during this time,” he adds.
McCurdy also recommends revisiting your retirement plan and having a clear understanding of your annual retirement income need. He suggests finding ways to reduce your annual expenses and capital outflows, which will alleviate some of the financial burden and pressure. “As you get to about 10 years away from retirement, you may want to start looking at de-risking your portfolio or becoming more conservative so that your portfolio is less volatile,” adds Clayborne.
“This life stage is likely your peak earning years, unless you’ve changed careers,” says Deer. He recommends focusing on trying to save as much as you need to in order to secure your long-term financial plan. “If you started saving early, this shouldn’t be a problem. If you’re starting late, that’s okay! There’s never a better time than today,” he says.
The key, adds Deer, is to start thinking about some of the finer details of your retirement — when will you take Social Security? What’s your health-care plan? How much of your retirement nest egg is in tax-advantaged accounts versus tax-free accounts, and how should you improve that profile? You can also help your growing children learn about the value of creating a budget and help them open a bank account and begin to build their own credit scores, Deer says.
Your 60s
You’ve worked hard all your life. Now it’s time to relax. Most Americans retire by their mid-60s, so you’ll probably stop working soon or at least taper back as you get further into this decade. “Your 60s are about enjoying the fruits of your labor and experiencing the rewarding feeling of financial freedom,” says McCurdy. For many, this is the beginning of when they can start mapping out what they want their retired years to look like: where will they live, what are some activities they want to get involved in, trips they want to take, things on their bucket list, and beyond.
“Before you retire, make sure you’re comfortable with how much flexibility you’ll need to have in your financial plan,” says Deer. If you need to continue working but not as much, you could also think about switching careers or picking up a part-time job to supplement your income.
Your 70s and beyond
“During this life stage, the focus usually shifts to budgeting and portfolio withdrawal,” says Deer. He explains that retirees can either withdraw a set amount of money each month or withdraw a percentage of the portfolio balance each month. “With the first strategy, the amount of income is more predictable, which makes budgeting easier,” he notes. “But you generally have more control over the portfolio’s overall drawdown and potential longevity with the percentage method.”
Deer recommends checking in on your retirement trajectory throughout this life phase. “Do you need to make adjustments? Are you on track? Perhaps you can spend a bit more now that you have more confidence in your plan,” he says.
It’s important to address, again, that not everyone is in the same boat financially — we’re all in different places, trying to navigate as best as we can. But some basic blueprints and tentpoles to reach for are always helpful when thinking about our futures.
Nicole Pajer is a freelance writer who has contributed to The New York Times, AARP, Woman’s Day, Parade, Men’s Journal, Wired, and Emmy Magazine. Follow her on Twitter @nicolepajer.
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