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May 2008 |
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This is part three in a series in which Debt Matters is exploring savings plans for every decade of our lives. To read about saving in your teens, click here. To read about saving in your 20s click here. Saving In Your 30s — Time to Get Dialed In There's Still Time to Harness the Power of Compound Interest, But You Must Start Now 
The trick to saving in your 30s is not getting distracted. Probably for the first time in your life you have a significant income without being hamstrung by the demands of debt and furnishing an empty apartment. The overriding financial goal should be to make serious progress on retirement savings. Starting a retirement fund after your 40th birthday is too late to take advantage of the power of compound interest. For example, if an investor starts saving $5,000 a year at age 30 and earns 7% interest, he or she will have $691,000 at age 65. If the same person waits until he or she is 40 to start saving, the fund will only be $316,000 at age 65. The high price of waiting: $375,000.
So with all that money on the line, don't get distracted. In your 20s, the goal was to start saving and get out of debt. In your 30s, clean up any remaining credit card or student loan debt quickly. If you are still saving for that first home, continue to do so, but also you need to save just a little for retirement. If you are already in your first home, and happily earning equity — all the better. You should definitely start saving significant amounts. And as we have mentioned before, there is no excuse for not contributing to your company's 401(k) plan if the employer offers matching contributions of any size. Do what you have to do to get your employer to do some of your wealth-building for you. To help you stay focused, we suggest picking an amount you can reasonably save between the ages of 30 and 40. Shoot for $50,000 at a minimum. If you earn 7% each year, it only takes $3,750 a year to clear $50,000 in a decade. Having a 10-year plan can help keep you focused on the here and now. Avoid temptation So, why are we stressing avoiding distractions in your 30s? Because there are a lot of them. Yes, you have more disposable income than ever and you can probably afford that $3,000 vacation, the $1,000 hi-def TV or the $450 a month car payment. But with the increased income comes increased temptation. And plenty of your peers will be buying big-ticket items, making it harder not to play along. The mistake too many people make is wasting a good chunk of their 30s, taking their bigger paycheck out for a test drive. You can probably have some creature comforts, but take care of your financial security first. |
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