Are you wondering how to get started on the road to financial stability?
As a former head of retirement at JPMorgan Asset Management, I have seen many paths to retirement and the critical steps – or missteps – that people have taken at every step of their investment journey.
Here are six key financial mistakes I’ve seen people in their 30s make, and why you should avoid them:
1. Not having emergency funds
Having an emergency fund is essential to avoid getting into debt later in life, when retirement goals should be at the forefront.
Ideally, this account should cover three to six months of living expenses so that you can overcome any unforeseen events such as job loss or costly medical issues.
It is wise to put your emergency fund in a savings account, not an investment account, so that you can access it immediately and not have to worry about a downturn in the markets affecting your money.
2. Being underinsured
A lot of people don’t like taking out insurance because it means paying for something they hope they never use.
But the consequences of not being insured are so great that they can devastate you financially. A medical emergency or an accident at work, for example, can change your financial trajectory.
The types of insurance that people do not need to purchase, but that I highly recommend, are:
- Term life insurance, to replace your income for a spouse or children in the event of death.
- Health insurance, to make sure that a large medical bill doesn’t force you into bankruptcy.
- Disability insurance, to make sure you and your family can maintain your standard of living if you are injured or unable to work.
- Tenant insurance, if you don’t own your home, you can replace your belongings in the event of theft or damage caused by fire, flood or other disaster.
3. Make minimum payments on high interest debt
If you have high interest student loans (above 5.8% interest rate), personal loans, or credit card debt, I always suggest paying them off as aggressively as possible before focus on low interest student loans, car loans or a mortgage.
In fact, it might be a good idea to only make the minimum payments on the low cost loans until you get rid of the high cost loans. The faster you can pay them off, the more money you’ll have to spend on other financial goals that become more and more important as you get into your 30s.
4. Buying too many houses
With the insane increase in house prices this year, there is a strong temptation to stretch out and take out a bigger mortgage than expected. But you need to make sure that your housing budget includes room for things like unexpected repairs, upkeep, and potential changes in your future income if you’re starting a family.
Home ownership is rewarding and can lead to wealth creation, but it is not guaranteed. What is guaranteed, however, is that you will have to spend a lot more on your home than the mortgage payment alone.
5. Don’t aggressively save for retirement
When you’re 30 years old, retirement can seem like a long way off. But every dollar you save for retirement now will have an additional 10 to 20 years to earn compound interest than money saved in your forties and fifties.
If you work for an employer with a 401 (k) or 403 (b) plan, at least save enough to get the employer match. It is the only guaranteed return on your savings that you will ever get. If your job doesn’t offer a 401 (k) plan, set up an IRA that will automatically transfer money from your checking account on payday.
If you aren’t maximizing the contributions you can make, promise to increase the amount you save every time you get a raise.
6. Save for your kids before saving for yourself
Once you’ve become a parent, it’s natural to want to put your children’s needs before your own. But saving for your children’s college education before saving for your own retirement is a huge mistake.
There are many ways to pay for college such as scholarships and choosing cheaper schools or loans. One of my children went to a public university and the other received scholarships in several schools. But there is no other way to pay for retirement than to save.
Anne Lester is the former Head of Retirement Solutions for the Solutions group of JPMorgan Asset Management, where she advanced the retirement investment product offerings and the company’s thought leadership program, developing investment products integrating anonymized data and knowledge of behavioral economics. Follow her on Instagram @savesmartwanne.