Young adults in today’s world have instant access to everything. From ordering food, setting up romantic dates, and getting a ride, everything is on their fingertips. When you are living such a fast-paced life, committing to making an investment can seem frivolous and unnecessary. After all, you can even have instant access to funds using a computer or your phone.
But just like all good things in life, financial success requires time and careful planning. It is not the idea of having a peaceful and stress-free retirement that drives early investment. Although early investing will help you achieve this, it is more than your retirement that is at stake when you don’t have a good investment plan in place.
Every decade in your life comes with unique opportunities and challenges. Irrespective of our personal and economic conditions, we can all agree that mistakes and rash decisions often pockmark the 20s.
However, in your 30s, you are not only in the prime of youth. You are also on the way to your maximum earning potentials. By the time you reach your 40s, you should be living your best life with a firm grasp on your financial condition. No one can get a perfect score in life, but the financial decisions you make in these two decades can have a considerable impact throughout your life.
In this post, smart investment plans to practice in your 30s and 40s, we take an in-depth look into how you can plan, invest, and monitor your finances.
Best Types of Investments for Your 30s and 40s
If you are in these golden stages of your life, the best types of investment are those that are long-term. Of course, it will be easier for those who have had experience with investing. But you cannot put it off forever. The sooner you get into investing, the better it is for you.
Investors in these age groups have a couple of decades to invest. This gives you leverage on time and the amount you can invest.
Some of the best types of funds to invest in are:
Mutual funds are widely accessible and straightforward. This makes it a great way to start the investing game. Unlike some types of funds that require extensive knowledge, mutual funds are relatively less complicated and easy to start as well.
Another reason why you should consider mutual fund investment is that it is quite diverse. As any financial expert will tell you, funds that allow you to have a diversified portfolio are the best types of investments.
Target Date Funds
This type of fund also does not require much effort from investors. But it is a great way to build your nest egg.
Typically Target Date Mutual Funds involve bonds and stocks, as well as cash. Almost all credible financial institutions have this investment plan in their inventory, so you will have no problem finding the right one.
Index Funds, S&P 500 Index Funds in particular, can allow you to build your stock portfolio very quickly. They also have low expense ratios, which adds to their advantage.
If you are looking to build a diverse portfolio without the burden of multiple funds, this may be the best option for you. However, not all Index Funds come at a low cost, so take a closer look before you commit.
If you have had some experience in investing, sector funds are the best way to maximize your earnings and diversify your portfolio even more. However, this may not be for those who are just testing the waters in the world of financial investment.
Most sector funds cover such areas, including technology and healthcare, among others. Since the funds focus on different industrial sectors, make it a point to spread your funds to multiple sectors.
Smart Investment Plans for Your 30s
When you know the type of investment funds that you can consider, it is an excellent place to start. But simply putting your money down on a couple of funds will not be enough to secure your future.
In your 30s, you are looking at possibly getting married and having a family. It is possible that you will change jobs more than once. There can be medical emergencies along the way and other possible scenarios that can derail your investment plans.
With clever planning and allocation, you will not have to panic every time there is an emergency.
Some smart ways to prepare for the unforeseen future are:
Increase Your Savings
Saving is a huge part of preparing for your future. According to the experts, you should be saving up to 15 percent of your monthly salary. But this is a guideline that not all Americans can follow.
If you are struggling to save even a little bit of money, here are some practical tips you can follow:
Pay Attention to Your 401(k)
By this time, you should be working in a company for a couple of years. An active contribution to this plan can have a substantial effect on your finances.
Most companies also have a 401(k) match plan. Here, your employer will match whatever amount you put into this account. The maximum percentage offered by companies in the match plan is up to three percent of your contribution.
However, a lot of employees do not have an idea about how much they are contributing to this plan. If you are one of those, you can get the information from the Human Resources department of your company.
If you had also been in such a plan in a previous company, make sure to merge the old account with the current one. You can do so without losing the money in your last account.
Open an Individual Retirement Account
Also known as the IRA, this is a great way to supplement your savings and investments. The IRA can be a separate one from your personal savings account.
There are multiple benefits to the IRA. First, it is totally tax-free. Second, you can make more pre-tax contributions if you have this account. Third, you get options to make different types of investments.
Have a Separate Investment Account
At the beginning of your investment journey, the initial payment is always the easiest. But making the following payments can be a challenge. You will be paying a fixed amount on a regular basis for the next 20 or 30 years.
It is neither practical nor safe to keep pulling this fund from your savings account. Savings are for emergencies, and if you drain the funds for the sake of investing, it is counterproductive.
Having a separate account for boosting investment is the best solution. It doesn’t have to be in a bank with a large amount. You can use online financial platforms to put aside small amounts. Among the online platforms that can be extremely handy is Acorns. Saving as little as your spare change can make all the difference in the long run.
Set Up Emergency Funds
Apart from your savings, emergency funds are an essential part of your investment plan. If you don’t have this in place, it may be possible that you will be required to pull out funds from your investment. This will not only set you back; it can possibly put an end to it.
In fact, investors who apply for early withdrawals are on the rise. This was revealed in a recent survey. It is never a good idea to use early withdrawals to pay for education.
But having an emergency fund can be a lifesaver in terms of medical emergencies, among others. Most experts agree that setting aside three to six months’ worth of your salary is a good plan for a rainy day. But of course, everyone has different socio-economic and financial situations, so this figure is variable.
Among the most preferred ways to set up emergency funds are a Certificate of Deposit (CD) and a savings account that has a reasonable rate of interest.
Smart Investment Plans for Your 40s
Most people in their 40s are a lot smarter when it comes to their finances. They usually have a budget in place, and they have a good handle on their spending as well
By this time, your financial planning should be firmly in place and steadily accumulating. That is assuming that you stuck to the plan in your 30s.
The best investment plan in your 40s is to keep the fees at a minimum, diversify your fund portfolios, and to maintain steam.
Some of the best financial moves to make in your 40s include:
Reducing the Fees
Financial institutions do not maintain your account for free. But most people do not realize this, while some have no idea that they are paying maintenance fees on their accounts.
This is especially true if you have been a part of a 401(k) plan in a couple of companies you worked previously – understand that there are charges. If you have a number of plans in your name, they can add up.
If you are not sure whether your employer is levying charges, consult the HR Department. If you have a previous plan in place, consider putting it into the current plan or into an IRA. You will pay lesser fees this way. You can also check your options, as some platforms have little to no low fees maintaining these types of plans.
Diversify Your Funds
A diverse investment portfolio is not only less risky; you can also maximize your earnings as well. In your 40s, it’s entirely possible that you are not cash-strapped like the previous decades, so you will have more to invest.
Apart from maintaining and monitoring your 401(k) and IRA, some other plans you can consider in your 40s include:
Health Savings Account
A Health Savings Account, or HSA, has a number of benefits that make it a great investment choice for those looking to retire in a couple of decades for these reasons:
- It is pre-tax saving.
- It has potential to earn indefinite interest.
- Anyone with a health plan that is high-deductible can avail it.
- It can be rolled over at the end of the year.
- It has different contribution limits for families as well as individuals.
Flexible Spending Account
Also called FSA, this is another excellent investment option for those in their 40s. It is also a pre-tax account. The contribution limit is lower than the HSA. Depending on the coverage you have on your health insurance, FSA can help you reduce the expenses on healthcare.
However, FSA does not have as much flexibility as HSA. It is also available only to those who are employed in a company that offers this benefit. A distinct disadvantage of FSA is that it cannot be rolled at the end of the year.
Consider Buying Insurance
Most people spend a good amount of time and effort preparing for retirement. But the same people would not consider getting insurance.
But according to the experts at Certified Financial Planner Board of Standards, foolproof financial planning involves getting some type of insurance. There is no saying what circumstance you will face in the coming days. An insurance policy, health insurance, in particular, can save your life.
There are two types of health insurance that you can consider. They are:
Term Life Insurance
It is also called term insurance. It is a type of life insurance which insures you for a fixed term. This means that cash payout can be done if you die within that particular term.
It is usually less expensive than other types of health insurance. However, outside of the term, there is no additional benefit from term insurance.
Whole Life Insurance
Known by different terms, including the whole of life insurance, ordinary life, and straight life, it is the most common type of health insurance. It is effective for an entire lifetime.
Whole life insurance is more expensive than term life insurance. You have to pay the premium regularly until the insured person dies. This is the prime reason why whole life insurance policies are not very affordable.
But it has a number of unbeatable advantages. These include:
- It is free of income-tax.
- You can secure a loan against the policy.
- If your situation compels, you may surrender the policy in exchange for cash.
Maintain Steam in Your Savings
Just because you have diversified your funds and have a good retirement plan in place, it does not mean that you neglect your savings. Assuming that you have maintained a steady saving over the last decade, your pot of savings will have become a lot heavier.
However, this decade can be tricky to maintain a steady pace with your savings. Life-changing events, such as getting married and buying a home, can make it impossible to nurture your savings.
Some of the ways to boost your savings are:
Increase Your Earnings
By now, you should be holding a job for some time. As you develop more skills and become confident, it is time to bump up your income. You can do so by asking your current employer for a raise or taking a new opportunity that pays better, among others. If you have the time, the skill, and the energy to squeeze in a side gig, that is fantastic.
Get Your Priorities in Order
As easy as it may seem, accumulating a number of debts using multiple credit card is not sensible. At this stage, you will be caught deciding between paying for a trip abroad, paying for your kid’s birthday, buying an expensive gift for your partner for the anniversary, or paying off the credit card debt.
Setting your financial priorities right can be tougher as a parent. Therefore, you need to be really straight-headed and make the best decision that will benefit your accounts, as well as your family.
Knock Off High-Interest Debt First
Caught in between multiple debts; it can be overwhelming. But the best strategy is to knock off the first debt on your hands that has the highest interest rate.
For most people, it is usually the payment for a car or a house. For some, it may be credit card payments.
Make the Most of Employer Benefits
If you are fortunate to work with the government or one of those companies that offer benefits, it makes no sense to skip it. Whether it is retirement benefits or some other employee benefit, make the most of your situation. A vast majority of Americans do not have help from their employer, so consider yourself lucky.
Children’s Education: To Pay or Not to Pay
Most people in their 40s will probably have children. Although only 29 percent of parents in America are willing to pay for their offspring’s education, it brings up the question of whether you will be footing the bill for school or not.
Education is by no means affordable in the United States. Fortunately, for parents who decide to pay for their child’s education, there are a number of ways you can prepare for the eventual spending.
A 529 plan is a tax-advantaged plan set in place to encourage saving for future education. It is applicable to tuitions for K-12, both private and public, as well as religious studies schools. It is of two types:
Educational Savings Plan
This plan allows you to save money, which can then be used for any expenses related to education. It can be used for tuitions and fees, as well as paying for rooms and board. The plan is tax-advantaged.
The account for this plan can be transferred from one child to another. However, there are penalties if you withdraw the plan.
Prepaid Tuition Plan
Unlike the previous plan, prepaid plans can only be used for tuitions and fees at select institutions. You cannot use this plan to pay for primary or secondary education, as well as room and board.
Most institutions allow the funds to be transferred in case your child transfers to another school that has this facility. In some cases, you can also ask for a refund. However, the rules and regulations differ from one school to the next, so double check before putting down your money.
The Coverdell Education Saving Account (ESA) is another tax-advantaged account that you can use to save for the children’s education. You can use the funds to pay for educational costs from K – 12 to college.
It comes with an age limit, meaning the funds have to be disbursed before the beneficiary attains the age of 30.
It is primarily a retirement account. However, there is a way you can use it for college savings.
You can withdraw the funds from this plan at any time if you are paying it for qualified education. You can do so without incurring the ten percent penalty charge for early withdrawal. An added advantage is that, if a child is listed as a beneficiary of Roth IRA, it will not affect their ability to avail other financial aids, in case any. However, it is not without disadvantage.
As we mentioned above, no success happens overnight, finances included. It takes some serious planning, lifestyle changes, and being consistent. Most days, it can be tempting to give it all up and take a luxury trip abroad.
But if history has taught us anything, those who prepare in advance do fare well in the future. It is ok to feel like surrendering and bid farewell to your investment plans. But why waste the prime days of your life, physically and financially, and suffer while you are old and grey?
Making smart investment moves in your 30s and 40s is more than preparing for a comfy retirement. It is investing in your health, your life, and your family.