Congratulations, you've successfully breached the 30 year threshold! For some, that task was accomplished many years ago and for others, more recently. The decade of your 30s can bring about a lot of change. And that pace of change seems to continue to accelerate. Let's go back 20 years shall we? In the year 2000, NSYNC was the best band on radio, Eminem released his hit single "The Real Slim Shady", and Cribs was the hottest show on MTV! Is a flood of memories starting to rush back? Same here. It doesn't seem like it was that long ago but is a great example of how fast time fly's. This is why getting your financial house in order is crucial. Regardless of if you are a newly minted 30 year old or on the backside of 39, there are moves you should be making with your money to help the financial viability of your future self. In this blog we are going to explore the top 5 money moves to make in your 30's because before you know it, Nickelback will be consider classic rock!
- Learn all the ways to get money into a Roth IRA
- Having an ownership stake is something is extremely value for your financial future
- Health and financial wellness are aligned very closely
- Why your 30s is when you need to start creating financial flexibility and liquidity
- Never stop investing in yourself. You are your most valuable asset.
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1.) Maximize Your Roth Opportunities
Most of you reading this are probably familiar with Roth IRAs. A quick recap for those who are not. A Roth IRA is an account type that allows individual investors to grow their investments in tax preferential ways. If certain requirements are met, all your money inside of the account can be used tax free. But just making contributions into a Roth IRA isn't the only way to take advantage of this type of account. Making sure you are maximizing all the different ways you can fund a Roth IRA is important. Because the more money you can get into a Roth IRA, the better off your future tax circumstance will be.
As mentioned before, you can make contributions into a Roth IRA. Making regular contributions into a Roth IRA is as easy as taking money from your checking or savings account and depositing that money into a Roth IRA. You can make up to $6,000 in contributions a year in 2021. That amount moves up to $7,000 if you are age 50 or older. However, there are income restrictions in place (here are the 2021 income limits). Meaning if you make to much money, you will not be allowed to make standard contributions into a Roth IRA.
Backdoor Roth Conversions
If you make to much money and are not allowed to contribute money to a Roth IRA, there is a workaround. That workaround is called a Backdoor Roth Conversion. Whereas a normal Roth IRA contribution is simply taking money from your bank account and depositing it into a Roth, a Backdoor Roth conversion takes a little more work.
You first must make a non-deductible contribution to a regular IRA. Regular IRAs don't have income restrictions but follow the same contribution limits ($6,000 & $7,000). So regardless of how much money you make, you can make a contribution to a regular IRA. In 2010, the rules were amended to eliminate the income restrictions on IRA to Roth IRA conversions. A conversion is simply moving money from your IRA into a Roth IRA. Any money that is converted within the year will be taxed as ordinary income.
However, if you make a non-deductible contribution into a regular IRA there is no tax liability you will need to worry about when you convert those dollars to a Roth IRA. And since there is no income limit on converting IRA to Roth IRA money, you can fund your Roth IRA account using this backdoor method. Just make sure you are following all of the rules and you understand the risks of doing so. Learn more about Backdoor Roth IRAs conversions here.
IRA to Roth IRA Conversions
You have the ability at any time to move money from your Traditional IRA to a Roth IRA. The most important factor to be aware of is the tax liability this will cause. Any money you move from your IRA to a Roth will be taxed as ordinary income. A sudden increase of extra income in any given year could propel yourself into a larger marginal tax bracket at the end of the year. This will defeat the purpose and benefit of a Roth IRA to begin with.
I think the best benefit of having the ability to make an IRA to Roth IRA conversion is that there is not minimum or maximum amount you are required to abide by. If you have a $100,000 IRA, you can convert $2,000, $20,000, or all $100,000. You get to make that determination depending on what your tax situation looks like in a given year. You are also allowed to make IRA to Roth IRA conversions in consecutive years. So you can make small conversions every year in your 30's while also making sure you are not accelerating any tax liability into a higher marginal tax bracket.
Mega Backdoor Roth Conversions
We've gotten to the point where we know there is income limitations and contribution limits in place when it comes to making contributions into a Roth IRA. We also know that those limits don't apply when it comes to conversions. But when doing a Backdoor Roth IRA conversion, we are limited by the amount of money we can initially contribution into the traditional IRA before we start the conversion. This becomes a problem for people who may have more money they would like to fund a Roth with, but are limited due to that $6,000 contribution yearly restriction.
This is where you may have the Mega Backdoor Roth conversion opportunity. If you have an employer that gives you access to a 401(k), allows for after-tax contributions into that 401(k), and allows for in-service withdraws, you may be in luck. 401(k)'s have a much higher limit on how much you can place into that type of an account compared to a Roth IRA. A 401(k) will allow an individual to contribute up to $58,000 every year.
So in theory, you could make a large after-tax contribution into your 401(k) and then convert that money into a Roth IRA. This will allow for far more money to be accumulated in a Roth IRA. But it's important to understand that you have to have the right kind of 401(k) to make this a possibility. It's worth learning that information because if you have the ability to make a Mega Backdoor Roth Conversion, you're going to want to be aware of that for future planning purposes.
2.) Own Something
You can diligently save yourself to great wealth but owning something gives you a much better opportunity. Having an equity stake in something will allow you to benefit from it's cashflows and appreciation. When I say "own something" I mean just that.
Start a business yourself, become a partner in a business venture, or get yourself some sort of shareholders interest. Doing this in your 30s and allowing the natural forces of compounding interest to increase the value of your ownership stake is a much greater wealth generator than just increasing your savings contributions a couple of percentage points each year. I also know that allocating your financial resources in a direction like this can be risky. But that is another benefit of doing it in your 30s. Take your shot and if it doesn't work out, you still have another 30+ years to make it back the more traditional way.
The other reason why owning something is so important is because it gives you more financial freedom. Having an equity stake in a growing asset (like a business) makes you less reliant on other sources of income, like your job. This gives you options as you age. You may be able to retire earlier, cut back on the number of hours you are required to work, or even restart in a brand new career that interests you more than what you are currently doing.
One of the most popular ways people in their 30s create an ownership interest in something is through real estate. Buy a property and rent it out or flip it. Another way you could begin your ownership journey is to start a side hustle. I never said whatever you own has to be profitable from the beginning. Start now while your young to give yourself a chance at creating something that will be worth substantially more down the road.
3.) Get Healthy
I read a statistic somewhere (not going to lie, it was probably twitter) but can't pinpoint the exact location. Nevertheless, someone mentioned that in the United States, it's not uncommon for someone in their 30's to gain 2 lbs. a year until they hit 50. This leads many people to become 30 - 40 pounds overweight as they cross the half century mark.
So what does this have to do with money? Actually, quite a bit. There are numerus statics and data points that show the healthier you are, physically and mentally, the more productive you become. You feel better, have more energy, and are usually in a better mood. These directly impact your finances. When you have more energy, you can do more at work. When you are in a better mode, you become more engaging with others. This could lead to more conversations about unique opportunities in life that otherwise may not be presented.
It also makes a big difference in that you will spend less on healthcare expenses. The little aches and pains that lead you to see your chiropractor on a monthly basis may not exist if you were healthier. You may not get sick as much and might not have to see a doctor as often when you are healthier. This could cut down on the amount of health insurance premiums you pay in a given year. Finally, a healthier lifestyle may allow you to cut down on some of your more unhealthy and expensive vices. Smoking is a great example. Not having to buy a pack of cigarettes ever couple of days is a bulletproof way to save some cash.
Getting healthy and creating a more healthy lifestyle in your 30s will form habits within yourself that will stick for the remainder of your life. So get started now. I don't care if your 30 or 39. Get a little more exercise, eat more green food, and just watch as your world starts changing for the better. Personally and financially.
4.) Create Liquidity And Flexibility
When you got your first job straight out of pharmacy school, chances are one of the decisions you were required to make was to determine how much money you wanted to contribute into your 401(k). You may even have gotten some unsolicited advice from an older co-worker about how important it is to increase that contribution every year. This isn't bad advice, but it should be looked at within the realm of a bigger picture.
I see it often from the baby boomer generation where they have the majority of their net worth wrapped up in retirement accounts, like a 401(k). Now saving money for retirement in a retirement account is a very smart move. But don't let yourself create to much of your net worth here. When you get into your 30's, you need to start diversifying your savings into other channels as well.
Being in your 30's means you're still young. You will encounter many financial opportunities that will present themselves to you in the future. These opportunities will almost certainly require some cash outlays. When you have the majority of your money wrapped up in a retirement account, it limits your ability to take advantage of these opportunities. So when you are in your 30s, you should make sure that you are preserving some financial flexibility and liquidity.
Now, this does not mean hoard all of your cash inside your checking or savings account. You can still invest your money for the long-term. Just make sure it's accessible if a better opportunity comes around. As you age out of your 30s and into your 40s & 50s, you will be very glad with your younger self that you diversified your wealth among different account types and investments.
5.) Invest In Yourself
Like I mentioned before, if you are in your 30s you are still considered young! The way longevity is playing out, many people in their 30s may have to work until they hit 70. Which means you still could have 30 to 40 years of work ahead of you. I hope that doesn't sound depressing, but it's true. The last thing you want to do is to stagnate with your personal and professional growth at this age.
Continue to invest in yourself. Continue to find ways to educate yourself. It could be for career purposes or maybe just personal development. The greatest financial benefit you have as a 30 something is your ability to generate income for yourself and your family. You are your most precious and valuable asset. Don't let yourself go to waste!
Living in your 30s is a wonderful thing. Hopefully you've transitioned from a poor new grad to a self sustaining and financially viable professional. Don't let that momentum lapse. Use these 5 money tips to help create a financial foundation in your 30s that will make the next handful of decades that much better!