A New Financial Era Has Begun — 7 Moves to Make in Your 30s
These seven financial moves can shape the rest of your life.
The great separation begins in your 30s. This is the period when the difference between those who accumulate wealth and those who question where their paycheck went grows significantly.
It almost always boils down to seven distinct financial actions that you need to take. The majority of people are unaware of them until they are in their 40s or 50s, at which point it is too late, particularly for the fourth move.
At the end of this article, you’ll know exactly what you need to do so you don’t end up on the wrong side of that gap.
1: Liquidity Stress Test
The liquidity stress test is the first financial action. The majority of people are unaware of how long they might survive financially if they were laid off tomorrow.
Therefore, the first thing you should do is figure out how much money you have, especially in liquid assets. This essentially refers to any asset that can be converted into cash in one to three days.
So, this would include money that you have in your savings account, your checking account, money market funds, and even cash that you keep in a shoebox.
This is crucial because you need to know how much liquid cash you have in case of an emergency or unforeseen expense. For example, I had to have my car towed to a repair shop on a Sunday when a wheel fell off, and you know that’s premium pricing.
The next stage is to determine the percentage of your total net worth that is in cash, since, contrary to popular belief, you might have too little or too much cash at different times. What is the ideal quantity of money to have, then, like Goldilocks?
Generally speaking, the quantity of cash you have is equal to the sum of your emergency fund and any short-term savings objectives you may have.
For example, if your 6-month emergency fund comes out to 30K, and you’re also trying to save 5K for a trip to Mexico City next year, then the right amount of cash for you is 35K.
Most people don’t realise how much money they’re losing by holding onto what I refer to as lazy cash, so after you know your liquid cash figure, the following step is exactly what I wish someone had told me about years ago.
2: Put Lazy Cash To Work
The money in your savings that isn’t helping you is known as lazy cash. That’s money and savings that you have lying around in your closet or drawers. Additionally, savings in a checking account or a conventional savings account fall under this category.
And keeping lazy cash costs you money in two ways.
Number 1: You are missing out on the income that it should be generating. And here I’m not writing about investing in the stock market.
Number 2: Is that inflation eats about 3% of its value every year. So, if you have 10K in lazy cash, it’s essentially buying you about $300 less of real-world stuff than it did 12 months ago.
The good news is that, since it must remain accessible and safe, you don’t have to risk this money in the stock market to make it work for you and earn your money. Instead, you require a straightforward multi-account cash stacking approach that automatically maximises your yield.
3: Optimise The Big Three
Optimising your big three expenses — housing, transportation, and food — is the next financial step. And we concentrate on these three things for a very important purpose.
You see, the most common mistake I see is that people try to save money by stopping themselves from buying a $7 iced coffee from Starbucks or getting the new Burger King Whopper. The problem is that all that is going to be wasted effort because it’s barely going to move the needle.
On the other hand, the greatest rewards will result from concentrating on the three main items. Here’s the math to support it. Let’s say your rent is 1.8K and your monthly income is $5,000. Approximately 36% of your total income is already being consumed by rent.
Now, let’s say you are going to give up your $7 iced latte with oat milk every single morning for an entire year. Doing some quick math, you save around 2.5K a year.
What if we only paid attention to one of the three major ones? Let’s say you discover a new place down the block that is $180 less expensive, or you have a roommate. You have to deal with the whole move and transition within the course of one weekend. After that, you won’t have to consider it once more.
You will therefore save roughly $2,100 annually in just one weekend’s worth of work, which is comparable to the benefits of giving up coffee for a whole year. However, you didn’t have to exhaust yourself and endure 365 mornings to make a comparable amount of money.
And if you really go for it and work hard to cut your major expense — the rent — by 20%, you’ll save more than $4,000 annually, which is nearly twice as much as you would save by limiting your coffee addiction for a single weekend decision.
The lesson is that trying to cut your tiny expenses only yields modest improvements and demands consistent willpower from you. In contrast, cutting one significant expense only necessitates one significant choice for greater outcomes.
And yes, there is a bit of a trade-off here in terms of your lifestyle, but I think for most people, we’re not actively thinking about these three big expenses in our day-to-day lives.
Paying for housing, transportation, and food is kind of just autopilot in our heads. So, sometimes it’s really helpful to just reflect on what are some areas that we can optimise.
The goal here is to try to save money in bigger areas so you can still have fun and enjoy your life with fewer expenses.
4: Credit Score maxing
Okay, so you could save more money with this next step than with all the others put together. Over your lifetime, you are worth hundreds of thousands of dollars. The term “credit score maxing above 800” refers to this.
The majority of people believe that your credit score only affects your chances of being granted a mortgage or any other kind of loan. However, it really dictates how much you have to pay, and there is a significant difference between a good and a high credit score.
Let’s say you’re buying a 450K house with a 30-year fixed-rate mortgage. If you had an excellent credit score, you’d qualify for about a 6.25% interest rate. You’d expect to pay around $2,770 a month. Over 30 years, that’s roughly $547,000 in interest payments.
Let’s assume for the moment that your credit is good. Not an awful credit score. We’re referring to merely mediocre credit. Your rate will now increase to 7.25%. Other than that, nothing has changed. Your monthly payment now appears to be $3,070, and you will have paid $655,000 in interest overall.
Meaning you’re going to pay over 100K extra for the same exact house just because your credit is not excellent.
There are two easy ways to increase your credit score.
First, to maintain a low credit utilisation rate, what proportion of your total credit available across all of your credit cards and loans are you actually utilising at any given time?
The trick here is to aim for under 30% utilisation; the lower, the better. Also, Experian ran numbers on this. If you have a really solid credit score around 79,0 and you decide to just max out all your credit cards, right? You use up all your total available credit.
You could lose around 110 to 130 points depending on your profile. We’re writing about going from 790 to 660 just because you maxed out your credit cards.
The second thing is to make sure you’re paying all your bills on time every billing cycle. If you miss one payment and it goes more than 30 days late, then that can actually tank your credit score.
According to Experian, just having a 30-day late payment can drop your credit score if you had 780 by 90 to 150 points. And that late payment can stay on your credit report for up to 7 years.
5: Maximise Tax-Free Opportunities
The following financial step, which is to maximise any tax-free money opportunities you may have, is perhaps the most underutilised one on this list because most individuals aren’t doing it or aren’t doing it right.
Some of the most common tax-free opportunities include the HSA, or Health Savings Account. And the purpose of this account is to cover health-related expenses.
But don’t let the name fool you because it’s actually the most tax-efficient account available. After all, it offers triple tax benefits.
First, contributions are pre-tax, meaning they will lower the total amount of income tax that you would pay.
Second, any growth in this account is tax-free.
And third, any withdrawals that you make for qualified medical expenses are also tax-free.
The Roth IRA, an Individual Retirement Account, comes next. In contrast to the HSA, which requires pre-tax contributions, a Roth IRA requires post-tax contributions. After you are paid, that is.
The best part here is that the profits you make in your Roth IRA grow tax-free. Plus, you can also withdraw your contributions here at any time.
One common error I witness is people opening an HSA or Roth IRA, depositing money, and then leaving it in cash. However, that money must be invested.
One thing here is to focus on maxing out your employer’s match first because that’s essentially free money.
These are the big three tax-advantaged accounts, but depending on your situation, there are a few others that might be worth knowing about.
For instance, you may wish to consider the 529 Plan if you have children or are considering having children. In essence, it’s a tax-free savings account for education.
Even if your kid doesn’t end up using all the money here, you can roll up to 35K of it into a Roth IRA under their name.
6: Create a Financial Plan
Making a financial plan for the next ten years of your life is the next financial step you should take in your 30s, which most people put off because it seems a little intimidating, but it is actually incredibly crucial.
A good 10-year financial plan tackles a few different categories that are all pretty important. I personally like to use the acronym NEST to make this easier.
N: Stands for your target net worth. You want to pick a concrete dollar amount here that we want to hit by the end of the next 10 years. Avoid being vague here.
Saying, “I want to be rich,” is not an actual figure because once you have a real target to shoot for, all other decisions will be much simpler.
E: Stands for the fundamentals of estate. A power of attorney, beneficiary designations, and a will are three things you should have in your 30s, even though it may seem a bit early to consider these items.
Especially if you are married or if you have a kid, this is really important.
S: stands for stages of life. So, this includes the big money milestones that you tend to have in your 30s, such as marriage, kids, buying a house, etc.
The good news is that these phases of life are comparatively predictable. Therefore, rather than realising it a little too late and having to sell our investments or take on enormous debt when they occur, we may prepare for them by having distinct saving goals and funds for each of these.
T: Stands for tracking, and this is specifically your progress towards your retirement.
And even though this is a 10-year plan, we should still know whether we are on pace for the long game of retiring.
According to Fidelity, you should have saved at least one time your salary by the time you are thirty. You should have roughly three times by the age of forty and roughly six times by the age of fifty.
Even though they are rough benchmarks, it’s helpful to see where you actually land against them and figure out if you need to adjust your savings rate or your timeline.
7: Savings Rate Maxing
Okay. Therefore, if you want to accumulate riches, the following step is the most crucial one. It’s known as savings rate maxing.
And I’m not exaggerating how impactful this is. I can actually prove it with math.
Let’s take two people earning 75K a year. And both of them have the same goal: to reach 100K in net worth as fast as possible.
The first person, Mr Magic Lamp, is obsessed with saving, and he puts away 15% of his income every year, but he’s only earning about a 3% return a year.
Bonito is the name of the second individual, correct? Almost nothing is saved by my puppy. Assume for the moment that he sets aside 4% of his earnings. Let’s assume, however, that he is an expert in the stock market and generates an annual return of 12%, which is four times higher.
So, the question is, who gets to 100K net worth first?
The answer is Mr Magic Lamp. It’s not even a close race.
Even though his stock market returns were around four times higher, Bonito doesn’t even cross that barrier until year 14, which is roughly twice as long as Mr Magic Lamp’s eight years.
So, the easiest way to figure out what your savings rate is is to first figure out how much money you spend.
I know spending can vary a lot month to month. So, let’s take the last 3 months of your spending and then just average that out.
Then figure out how much money you earn in a given month. If your income varies, then just take the average of the past 3 months.
You want to identify the difference now. In other words, the difference between your monthly income and expenses. Your saved amount is that difference.
Next, divide your entire savings by your income. Your savings rate is calculated by multiplying that by 100.
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