Investing in your 30s

I spent the last three years of my life working at a registered investment advisory firm that managed over $1B in assets under management.

I learned a ton about managing money and investing, and I became a CERTIFIED FINANCIAL PLANNER™.

I like to explain what I did on a daily basis as being an assistant to rich people.

I worked at the type of firm that I definitely plan to hire to manage my own money in the future. It is a fee only firm that is one of the best. It was a huge privilege to learn under such a great team.

What I know for sure is that investing is something you can learn and do yourself, but there is a learning curve that is part science and part art.

The list below is 21 tips for investing in your 30s that gets to the heart of the science part of investing. It’s the general information that you can use to learn more about investing (whether you decide to do it yourself or hire someone).

 

21 Tips For Investing In Your 30s

Here’s a list of 21 tips for investing in your 30s that will help you set yourself up for success for the rest of your life.

I broke up each section by parts, since this is such a long post. Here’s a look at the parts listed below.

Okay, let’s get started!

 

Part 1: Get ready to invest

Before you start investing, you need to make sure you’re ready to invest.

I know it seems like overkill, but seriously most Americans would be in 100x better financial health if they just did the first items on this list.

So, it doesn’t feel right not including them.

Here’s what I mean by getting ready to invest…

 

1. Set financial goals (why are you investing?)

Set financial goals for yourself and your family.

If you’re not sure where to start with setting financial goals, ask yourself these questions:

  • What are your short term and long term financial goals?
  • Why do you want to invest?
  • Do you want to retire? At what age?
  • What withdrawal rate do you want to take off your investments during retirement (e.g.: 4%)?
  • What is your money philosophy (e.g.: Do you think time creates money or do you think you’re responsible for creating more money?)?
  • Do you want to pay off your mortgage, if you have one? How soon?

Don’t let yourself indulge in “I don’t know” or freak out about setting financial goals. You can set simple goals like “get out of debt” and “maximize retirement savings.”

Nothing sophisticated is required here. Just clarity. You need to be clear about your financial goals before you start investing.

Here are a couple posts to help if you’re feeling stuck on financial goals…

 

2. Pay off your debt (student loans, cars, credit cards, etc.)

Before you get to investing in the stock market, it’s a good idea to have your debt paid off.

Here’s a post about the general savings and debt ratios the pros recommend (this is what I learned in my CFP studying).

Before you start investing, having your consumer debt paid off is a really smart idea. Otherwise, you’re just trading interest rates and not factoring in the risk with debt. (Example: having a car loan at 3% interest rate and credit card debt at 15%, then saving for retirement with a rate of return that’s unknown and can’t be guaranteed.)

When you have consumer debt, you’re guaranteed to lose exactly what the interest rate is on your debt every month, compounded over time.

For this reason, investing rarely makes sense when you have consumer debt.

I also know that most people in their 30s want to invest because it sounds sexy. This is not a great reason to invest.

Pay off the credit cards. Pay off the car loan. Pay off the wedding loan (yes, I see this a lot!). Pay off the student loans.

Then, invest.

Mortgage debt and business debt is a little different. But for purposes of “paying off debt” before you invest, generally, you want to pay off consumer debt first because it’s not collateralized (e.g.: you can sell your home; you can sell your education).

Here are a blog posts to help with getting out of debt…

 

3. Save an emergency fund

If you don’t have an emergency fund, you are in a state of emergency.

It’s not a matter of *if* an emergency will happen – it’s a matter of when.

Life happens. Things cost money.

You need to have some cash stashed away that is not invested to cover emergencies.

The pros say to have 3-6 months of non-discretionary expenses saved. I would say this is the minimum you should have saved. If you lose your job, have a medical emergency, or something else that’s super expensive, you need cash ready to cover it more than you need it invested in the market.

Here are  blog posts to help with saving an emergency fund…

 

4. Stop calling your primary home an investment

Can we be honest here and admit that your house is your primary residence, and the primary purpose of it is to house you and your family?

Calling it an investment and being house poor is not helping your financial life.

Yes, your house goes on your net worth statement as an asset, but that’s against your mortgage, and that doesn’t even consider all the money you have to put into it.

Buying a house is great for having a home. Hopefully, when you sell it, you make a profit.

But, let’s not call your primary residence part of your overall investment strategy.

 

5. Educate yourself (books + listen to podcasts)

Get reading and listening to podcasts about investing.

No one will ever care more about your money than you will, that much I know for sure.

Investing is like learning a foreign language and it can feel overwhelming. But if you learn a little bit every day, by this time next year, you’ll be in a totally different place.

It’s your responsibility — not your spouse’s, not your financial advisor’s, not anyone else’s — to learn about your money and know exactly what’s happening with it.

The great news is that you’re living in the information era where you can learn so easily (and for free).

Start with these books (I love them!)…

You can check out my favorite money podcasts here.

 

6. Start small if you’re scared ($100 at a time, for example)

After you’ve done some research, even if you’re a little nervous, start to invest with small amounts of money. This is better than doing nothing (assuming you’re out of debt and have an emergency fund in place).

Like anything new, when you start it’s going to be uncomfortable.

I remember when I first put money into an employer retirement account and saw the money go down – it was horrible. I was so freaked out.

Now, I don’t think that way at all. I’ve completed changed my mindset around investing. I did this by learning a ton about money and investing and immersing myself in it (I even did it as my job).

No one is born knowing how to invest. You have to start somewhere!

 

Part 2: Decide where to invest

After all the prepping is done — you set goals, you’re out of debt, you have an emergency fund, you read up on investing — the next step is deciding where to invest your money. This includes account types and institutions.

 

7. Start with your employer’s retirement plan (like a 401k, 457, of 403b)

Generally, a good place to start investing is in your employer sponsored retirement plan.

Examples of employer-sponsored retirement plans are:

  • 401k
  • 403b
  • 457

To find out what plan your employer offers, ask your HR department. There will be one place where you have to open an account if you use your employer’s retirement plan (e.g.: Fidelity).

There are many reasons to start investing by using your employer’s retirement plan:

  • It’s easy.
  • You can have your contributions auto deducted from your paycheck.
  • The contribution limits are high (in 2018, you can contribute $18,500 or $24,500 if you’re over 50, per year).
  • If your employer offers a match of any kind, this is free money that you don’t want to leave on the table. (Law firms hate their employees and never did this, but for the rest of you, take advantage!!)
  • There are legal protections in place that will generally prevent you from being charged obnoxious fees that you could be charged in a taxable brokerage account if you don’t know what you’re doing.

If you are self employed, you can open up your own “employer” retirement account in a solo 401k.

As an employer, I highly suggest contributing up to the employer match. After that, you should look at the investment options in the plan to make sure that they’re the best. The technically correct thing to do at this point would be open your own investment account (the following two steps) if you could get better investment options and lower fees. I’m including this because it’s the technically correct thing to do. But, proceed with caution. You’re more likely to get ripped off via expensive funds, with hidden fees when you’re doing it on your own if you’re figuring it out for the first time yourself.

A good *ambitious* goal for most 30 somethings is to “max-out” your employer sponsored retirement plan. This means contribute up to the maximum allowed by law, which is $18.5k this year. Usually, this is where my investment advice stops with my friends because so few 30 somethings are debt free, have a six month emergency fund, and can invest $18.5k per spouse per year.

Here are a blog posts to start investing in your retirement plan…

 

8. Supplement that plan with a Roth IRA or Traditional IRA

After you’ve maxed out your employer sponsored retirement plan (or contributed up to the match), another retirement plan to go for is a Roth IRA or Traditional IRA.

The difference between a Roth IRA and Traditional IRA is whether you contribute with pre-tax or after tax dollars. If you make more than a certain amount of money every year, you can’t contribute to a Roth IRA. In that case, you’d invest in the Traditional IRA. For 2018, if you’re single and make less than $120k, you can contribute to a Roth IRA. If you’re married filing jointly, the income limit is $189k and starts to phase out from there. See the IRS rules for details.

The difference between the accounts is tax treatment. In the Roth IRA, you contribute after tax dollars (meaning, you pay tax now and your contribution and earnings grow tax free). In a Traditional IRA, you contribute pre-tax dollars and have to pay tax when you take distributions during retirement.

The contribution limit for 2018 in both types of accounts is $5,500 ($6,500 if you’re over 50).

You can open these accounts at any brokerage house. Some of my favorites are Schwab and Fidelity because of their exceptional customer service and help with investing (something to consider besides cost if you’re investing on your own).

If you start contributing $5,500 per year in your IRA at age 30, assuming a 6% return, you’ll have about $740k at age 67.

A *super ambitious* goal for most 30 somethings is to max out an employer retirement plan and a Roth/Traditional IRA. If you’ve maxed out both these types of accounts, you are winning the retirement savings game (contributing $18.5k + $5.5k for a total of $24k per year).

Here’s a blog post to start investing in a Roth IRA…

 

9. After you’ve maxed out all your retirement accounts, open a taxable investment account

I don’t know anyone personally who is in their 30s maxing out all their retirement accounts and ready for this step, but I do know a lot of people investing in taxable investment accounts anyways.

Why?

Because it’s sexy.

Yes, that’s the only reason. Everyone loves talking about “investing” so they open an “investment account” (which ends up being a taxable investment account) and starting throwing money into it.

Ugh.

It’ ain’t pretty.

Why is this so bad?

Because there are so many ways for you to get screwed.

Here’s my favorite example of my friend getting screwed. I have a lawyer friend who decided not to invest in his employer’s 401k plan (for no apparent reason). Instead, he decided to invest with his friend, who is a commission-based advisor at one of the big financial firms (think Northwestern, Wells Fargo, etc.). I took a look at the fee schedule and he is paying  a FOUR PERCENT FRONT LOAD on his investments. This means for every investment he makes, the advisor is taking 4% off the top. This is INSANE. Industry standard for total fees (advisor and fund) should be under 2%. But he claims he’s only paying $25 per month! How can this be? He makes his contribution and never sees the 4% come off the top. This is why the fiduciary rule is such a big deal. A fiduciary (or fee-only financial planner) would be prohibited from doing this because it’s not in the client’s best interest.

If you know what you’re doing, investing isn’t that complicated. You don’t have to know the financial details of stocks or analyze Morningstar reports. But you do have to know how not to get screwed.

The best resource I know of that explains this very clearly is the book by Tony Robbins, called Unshakeable. I highly recommend this book before you invest on your own so you can understand the industry.

You can open a taxable investment account where you have your Roth IRA or Traditional IRA (aka any brokerage house). Again, my favs are Schwab and Fidelity.

A *super duper ambitious* goal for most 30 somethings is to max out an employer retirement plan, and a Roth/Traditional IRA, and invest in a taxable investment account, at a certain percent of income, such as 5% or 10%.

 

10. Use a health savings account (HSA) for additional tax savings

One thing you can do alongside investing is contribute to a health savings accounts (HSA) if you qualify.

You qualify for an HSA if you have a high deductible health plan. The idea is that you contribute pretax dollars and can invest that money to use down the road for healthcare.

There are contribution limits for HSA’s. In 2018, a single person can contribute up to $3,450, and a family can contribute up to $6,900.

When you make your election / contribution, you’ll receive checks and a debit card that you can use to pay for qualifying medical expenses. You can keep your contributions as cash in the account or invest in stocks, bonds, mutual funds, etc.

Most health insurance providers offer an HSA account option. If yours doesn’t, you can open one at a separate financial institution.

There’s really no reason not to utilize an HSA other than having debt or not having an emergency fund. But if you have these things covered, an HSA is a great way to lower your tax burden and save money for healthcare in an investment vehicle.

 

 

11. After you have yourself taken care of, save for your kids’ college

You know how on airplanes you’re instructed to put the oxygen mask on yourself before helping your kids?

That’s how you should think about your financial life. You should take care of yourself, then help your kids.

I see people with their own student loan debt investing in their kids savings accounts all the time, which is a huge mistake. It’s super understandable that you want to take care of your kids, but you have to fight that urge with better information that says take care of yourself first.

If something happens to you, your student loans don’t go away. You have to pay for them no matter what. But if something happens and you’re investing in your kids college, you can just stop. Student loan debt is forever. It’s not good debt.

Once you’re covered, saving and investing in your own retirement, the next step is to save for your kids. Just make sure you do it when you’re actually ready. Typically, this is done through a CollegeAdvantage.com plan, but there are many options that are state specific and have tax advantages (e.g.: in Ohio, you can deduct up to $​4k of contributions per beneficiary, per year on your state tax return).

When the time is right, save for your kid’s education as part of your overall financial plan.

 

Part 3: Decide how to invest

Once you have your accounts opened, you have to decide what to do in them. This is where I see most people freeze.

 

12. Know how risky you want to be

Before you decide how to invest your money within an account, you need to decide how risky you want to be.

Risk tolerance is how comfortable you are taking risk.

Risk capacity is how much risk you can take on given your circumstances.

For example, if you have a crap ton of money but you’re terrified of investing, you have a low risk tolerance and high risk capacity. If you have a very small amount of money to invest but are very comfortable investing, you have a high risk tolerance and low risk capacity.

Aside from risk factors, there’s your age, your time horizon, and the purpose you’re investing for.

For purposes of this post, let’s say you’re a 30 something investor who wants to invest for retirement. Meaning, your time horizon is really far away. You feel somewhat comfortable investing and you plan to max out your retirement accounts.

In this scenario, I’d want to be pretty aggressive with the asset allocation to give the money the chance to grow a lot over the next 30 years. If you needed the money in 5 years, my answer would be totally different (with a much more risk averse allocation).

If you want to have some fun in the market, do it. But do it for fun. Don’t do it for your retirement strategy. For example if you love crypto currency, set aside some fun money to invest in it with. Do not use your retirement money for this stuff. It’s too risky!

There’s nothing wrong with having a little fun in the market, you just have to have your expectations in the right place.

 

13. Pay more attention to how your portfolio is allocated than to the specific funds

To decide how risky you want to be, you’ll need to decide on an asset allocation.

The way your portfolio is allocated matters more than the specific securities you have in it. 

Think of a bag of candy. Asset allocation is the ratio of chocolate, hard candy, bubble gum, and mints in the bag. The ratio of categories matters a lot. The specific types of each category of candy are the securities (e.g. Twix, Snickers, Juicy Fruit, Big Red, etc.). These don’t matter as much. It matters a lot that you have the ratio you want – say 75% chocolate, 10% hard candy, 10% bubble gum, and 5% mints. It doesn’t matter as much what the types of candy are within each category.

This means you need to decide on the right asset allocation for you — the ratios of securities you want in your portfolio. You don’t need to decide on the specific securities. Read my post on asset allocation to see examples of different types of allocations.

Now, if you want to have some fun and invest in random stocks because you like the stock, go for it. But don’t do this as your long term retirement planning strategy.

Here’s a blog post about asset allocation…

 

14. Passive vs active investing

When you’re choosing how to invest your money in specific funds for your asset allocation, you’ll quickly find there’s a difference between active investing and passive investing.

  • Active investing means you research funds, buy and sell more frequently based on where you think the market is headed. You, as an investor, take a very active approach to your day to day investing.
  • Passive investing means you buy a basket of stocks and hold onto them for the long haul, regardless of how the market is doing.

There are also active and passive funds. This is likely where you’ll have to make your decision. Mutual funds and exchange traded funds can follow an active of passive approach.

  • Active funds have portfolio managers that make decisions about the stocks and bonds in the funds. They’re buying and selling daily, trying to beat the market. These are more expensive.
  • Passive funds have portfolio managers that are content with following have a basket of stocks and bonds that follow the index — but not beat it.

Generally, over time, passive investing wins (although there are pros who will disagree, even with data to show it). You pay more for active investing, but the market is so unpredictable that it’s hard for the best investors to beat itYou, as an investor, can choose to invest in active funds, passive funds, or a mix of both. Generally, it’s wise to choose passive funds if you’re investing long term because they’re less expensive and they perform better.

Here’s a couple blog posts that may help here…

 

15. Be fairly aggressive if your time horizon is retirement

If you’re investing for retirement in say 25-35 years, it’s generally agreed upon that a more aggressive asset allocation is better, barring any other extraneous circumstances. You have a lot of time to make up for any downturn in the market. Even the people who were saving for retirement during 2009 came out on top in a couple of years.

The longer time horizon makes a more aggressive portfolio a good idea if you’re starting to save for retirement in your 30s.

Here’s an example of an aggressive portfolio mix: 

  • 85% Equities
  • 15% Bonds

Within those broader categories, you’ll have to choose the subcategories. For example:

  • 30% Large-cap equities
  • 15% Mid-cap equities
  • 15% Small-cap equities
  • 25% Foreign or Emerging markets (equities)
  • 15% Intermediate-term bond

There are passive funds in each of these categories you can choose. Fund availability depends on where you’re accounts are (e.g.: Schwab vs Fidelity). Not all institutions have the same funds. But you will always be able to get the asset allocation that you want.

There are more examples of asset allocations in this post.

 

16. Watch out for fees!

The one *big* factor that you need to watch out for when you’re choosing an asset allocation (and what makes investing on your own such a challenge) is fees.

Fees are everywhere.

And that’s not really the worst part. The worst part is that fees are usually hidden, making it hard for you to tell what you’re actually paying.

There are fees in the funds that you select. There are trading fees (a fee for every time you buy and sell). There are fees you pay to an advisor, if you use one.

Fees on fees on fees!

The fees that the funds charge (mutual funds and ETFs) can be found by identifying the expense ratio. This will be a percentage number. Whatever your expense ratio is for a fund is what you pay in fees for using that fund. Typically, for mutual funds, the average expense ratio is between 0.5% and 1.0%. The average expense ratio for ETFs is even lower at about 0.25%.

Compare these percentages to the 4% my friend was paying in the example above and it’s nuts! But his fees were hidden in what’s called a front load.

load is a mutual fund that comes with a sales charge or commission. You always want no-load funds. No load funds are funds that don’t have any commission with them. They’ll only have the normal fee identified as the expense ratio.

My friend could see a rate of return from the market at 9% but really he’s only getting 5% of that (at best) because of the front load.

The trading cost isn’t something that’s typically hidden and can range from $2 to $20, depending on the fund (typically in the $5 range). While Schwab and Fidelity aren’t the cheapest on the market, they’re both so good with customer service and helping you invest that I think it’s 100% worth a few extra dollars for the trading cost.

There will be a fee schedule on your statements where you can find this information. The problem is that to the average person looking at their statement, they’re only going to look at the balance and rate of return and not pay attention to anything they don’t understand (like a load).

 

Part 4: Implement, track, and monitor

Once you’ve decided where and how you want to invest your money, it’s time for you to implement your plan, track your progress, and monitor it to make sure it’s working.

 

17. Rebalance, rebalance, rebalance!

Periodically, you’ll need to buy and sell funds to rebalance your portfolio.

Rebalancing is the process of selling funds in your portfolio that have increased to throw your initial asset allocation out of balance. When you sell funds that have increased a certain asset class, you’ll then need to buy new funds in other classes to keep everything in balance, according to your initial asset allocation.

For example, if your stocks grow, you may end up with 90% of your portfolio in equities, when really you only want 85%. You’ll need to sell 5% of the funds that have grown a lot, then buy funds in an asset class that is under-weighted in your portfolio.

Even if you are following a passive investment strategy of investing for the long term, you have to rebalance your portfolio periodically. How often you do it is personal preference. Some say every two weeks, others say monthly.

I know people who have retirement accounts that were never rolled over and haven’t been touched for years. Even if the right allocation was chose at the time, they’re going to be way out of balance now.

For this reason, it’s really important you rebalance to stay within your initial asset allocation (again, your asset allocation is the most important part!).

 

18. Hold investment meetings with yourself

The best way I know to constantly monitor and rebalance your portfolio is to set up periodic investment meetings with yourself. This can be monthly, when you do your monthly budget meetings or it can be another time (like quarterly).

The point is not to freak out about market performance during this time. The key is to make sure everything is working how it’s supposed to be, including your funds are allocated properly, nothing is going terribly wrong in your accounts, etc.

 

19. Expect ups and downs – this is the stock market after all

Unless you’re day trading, there’s no reason to freak out about the market. In other words, if you’re investing for the long term (say for retirement in 20 to 30 years), there’s no reason to react and worry about the ups and downs in the very short term if you believe that over time, the market will go up.

The media looooves to use scare tactics about market performance. Don’t fall for it! Stick to your strategy. Rebalance as needed. Don’t freak out.

 

Part 5: Take it to the next level with financial planning

The next phase of investing in your 30s is to take it to the next level with financial planning.

 

20. Start incorporating all areas of wealth management into your financial life.

This post is about specific investment tips. In addition to all the investment strategies, you can add wealth management strategies to your financial planning.

Wealth management includes tax planning, estate planning, insurance planning, retirement planning, education planning, and cash flow planning.

This is where you can take it up a notch and really maximize your financial health by looking at everything as a whole.

 

21. Hire a pro (but only the right pro!)

Last, but not least, hire a professional. The right professional will help you with your investment planning and all your wealth management planning.

The key is getting the right advisor. I highly suggest hiring someone who is a fiduciary, so that they have a duty to act in your best interest. Here’s a blog post I wrote going over how to know if you’re hiring the right financial advisor.

Hiring the wrong advisor can leave you much worse off than if you never hired anyone in the first place, so make sure you do your research ahead of time.

Here’s a blog post you should read before hiring a financial advisor…

 

A Final Note!

These are general investing tips for investing in your 30s that can help you get some insight into where to start.

To recap, here are the parts that I broke up this post into (click to go to each section).

Investing is one of those things that most people either love (and geek out on) or are terrified by (and avoid).

I don’t geek out on it but forced myself to learn it because it’s so important. So, if I can do it, I’m confident you can, too!

If you’re like me and don’t really get jazzed about the stock market, start small.

Read one investing book, listen to one podcast, invest $100.

Slow and steady wins this race. Your money is too important not to learn this stuff! 🙂