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Some people will say your 30s are like your 20s but with money. As someone who has crossed that 30-something line I can confirm that there are many similarities between your 20s and 30s but there are also a lot of differences. With more years likely comes deeper wisdom, a stronger sense of self, and a stronger desire to not leave your house past 8pm. While those extra years would hopefully yield more wealth, unfortunately, that is not the case for all. Too many people carry those mistakes they made in their 20s into their 30s. Here we’ll tackle the money mistakes to avoid in your 30s and finally start building the sort of wealth that will carry you to financial security in the future.
Enough is enough. This may be an unpopular opinion, but carrying student loans for 10+ years is ridiculous. The average monthly student loan repayment is an estimated $460 and the average borrower takes 20 years to repay their loan. (1) These are astounding figures, especially considering that $460 invested every month over 20 years with an 8% rate of return would yield over $250,000-enough for a downpayment on a very nice house, private school college tuition, or 4-5 brand new cars! Monthly tuition repayment prevents you from investing at your maximum level because you’re just bleeding money. To get rid of these loans I suggest trying at least one of two things. One option is to find ways to bring in more money each month that can go to the principal balance. Make more money you say? Why didn’t I think of that. Well truth be told…you didn’t. Before you tell me I sound out of touch, I am speaking from experience having paid off my own undergrad and grad school student loans in just a few short years. Get a second job, take on a side hustle, or simply re-budget your current spending. You won’t pay down your debt quickly if month over month most of your repayment goes to interest. Another option is to participate in debt forgiveness programs that will help wipe out some if not all of the debt. Don’t let student loans be a money mistake you carry into your 30s.
My favorite rule of investing is invest early and often. If you’ve already started investing in your 20’s then congratulations-you are already milestones ahead of where I was. Now is a good time to re-evaluate your investment strategy. Perhaps in your 20s you were only comfortable investing a few hundred a month because that’s all you could afford. However, in your 30s you’ve likely increased your salary. If you’ve already tackled your student loans or other outstanding consumer debt (eg. Credit cards), now is a good time to think about increasing your weekly/monthly contribution. Just to give you some context, $500 invested every month over 10 years at a 7% rate of return yields $86,743. Now assuming at the halfway mark you increase your contribution to $1,000 a month. After ten years, you would net $122,540, over $35,000 more than you would have had if you stayed at the $500 monthly contribution.
My first experience with investing was at 21 with my company’s 401k plan. I invested 6% with a company match of 6%. At the time I thought I was doing great. I was paying off my student loans, saving for a car, and saving for retirement. I kept up this 6% investment rate for quite some time. Eventually I purchased the car I wanted and paid off my undergrad loans but my rate of investment stayed the same. In retrospect I lost out on quite a bit of earnings because I wasn’t maxing out my tax advantage accounts. The IRS allows us as employees to contribute up to a certain amount of our gross income every year to tax advantage accounts such as IRAs and 401ks. In 2021, the cap on employee contribution to a 401k is $20,500. I love playing with numbers so let’s do some math.
Back in 2014 I had finished paying off my student loans which presented itself with a great opportunity to start increasing my contribution. At the time I was brining home around $85,000. With that same 6% contribution, I was only contributing $5,100 annually to my 401k, well below the $17,500 cap at the time. In that one year alone, I missed out on $12,400 of my own contributions that could have gone to my 401k. That $12,400 may not seem like a lot, but compounded over time would equate to thousands of dollars at this point.
My current household income is about 5x what I used to make in my first job out of college. However, if you asked me about my lifestyle, I would swear that it’s barely changed since those days. If my lifestyle hasn’t changed, then every month I should be swimming in cash. However, that is not the case. So what’s changed? Well this things called lifestyle creep or lifestyle inflation happens. As we make more money and have more disposable income at our fingertips, we tend to increase our lifestyle. For example, I used to buy makeup at the drug store exclusively because at the time, the idea of a $20 lipstick was out of my price range. The other day I shamefully dropped $40 on a new Gucci lipstick (don’t judge). Perhaps you order out more often or stay at nicer hotels. The reality is that our lifestyles do change and there is nothing wrong with that. We make money so we can live comfortable lives. However, when we fall victim to lifestyle creep, we also take part in one of the biggest money mistakes to avoid in your 30s which is not taking advantage of that extra income. Revisit your budget and find places to cut back. That extra income can go to investing, paying down debt, or whatever else you’re saving for. Don’t let the appeal of an over indulgent lifestyle hold your back from your financial goals.
As parent you’re led to believe that your children come first no matter what. In most cases I would agree with that sentiment. However, when it comes to personal finance, saving for your kids before saving for yourself is one of the biggest money mistakes to avoid in your 30s.
Let’s assume you have two children close in age. The estimated cost of a private college education in 18 years will very likely surpass $300,000 (2). With this estimate, you and your spouse will have to cover $600,000 in just a few short years (assuming no additional financial assistance). At a moderate growth rate of +7% over 18 years, this equates to roughly $1,500 contributed every month just to cover these expenses. If you and/or your partner are well-off enough that you can cover both the $1,500 a month plus your own retirement contributions then you can skip this. However, for the average American, it’s stretching it. By the time your child goes to college, you will be at least in your 50s (for most parents), leaving you closer to retirement than before. Your children have a lifetime to accumulate their own wealth. They can also take advantage of various financial assistance programs, scholarships, and debt forgiveness plans. While I don’t encourage you to leave your children high and dry (I myself was very fortunate to have parents who helped me through college), I don’t encourage you to send them to college at the expense of your retirement. In your older years you will have limited opportunities to seek additional income or you may even become victim to unsuspected health issues which may limit your ability to work. Make sure to prioritize your own retirement plan so you can live your golden years in peace and stability. For more information on leaving generational wealth, you can check out our post here.
Sources:
1. Hanson, Melanie. “Average Student Loan Payment” EducationData.org, December 27, 2021, https://educationdata.org/average-student-loan-payment (accessed January 26, 2022)
2. College Tuition Estimator https://vanguard.wealthmsi.com/collcost.php#results