For most people, the exercise and nutrition habits that work best for them in their 20s can change during middle age and again during the retirement years.
This pattern holds true for personal finances, too. The things we should be doing in our 20s to stay financially healthy aren’t necessarily the same later in life.
With that idea in mind, I’ve listed a few guidelines — an age-appropriate do-to list of sorts — to help you stay on track financially.
20-Somethings: Building Foundations; Eliminating Debt
During your 20s, you should focus on setting and sticking to a budget, making sure you spend less than you earn, building good saving habits, and investing for your future. These activities will help build a solid financial foundation.
Create an emergency fund – or two. One emergency fund should cover unexpected expenses like a car repair or medical bill. The other emergency fund should contain at least three months’ worth of income, to cover your day-to-day living expenses in the event that you are laid off or unable to work.
Once you have your emergency funds in place, debt reduction should be your next focus. Debt can prevent you from achieving your financial goals and tie up a major chunk of your income, making it harder for you to enjoy your life. You may have student loan debt, car payments, or debt from furnishing your first apartment or building your work wardrobe. Stop using your cards, and work on reducing your debt now.
That said, tackle your debt carefully: Don’t make larger credit card payments than you can afford. If you run short on funds, you’ll find yourself dipping into your emergency fund or making more charges on your credit card to keep your head above water. A better strategy is to pay your minimum payment, plus whatever you realistically can afford above the minimum. Once one balance is paid off, apply the money you would have been putting toward that account to making larger installments on the next card. (This debt repayment strategy is commonly referred to as the “snowball method”.)
Start saving for retirement. This can be a tough one at this age, when there are more pressing needs and retirement seems far in the distance. But the more time you spend saving, the better your chances are of saving the amount you’ll need to live on after you stop working. Start contributing a percentage of your paycheck that seems doable to you and try to increase it by one or two percent every six months to a year. Do this until you’re able to set aside 10 to 15 percent of your income.
In Your 30s: Sustaining and Growing Your Wealth
During your 30s, your main priority should be building and protecting your wealth. To accomplish this, you may need to devote effort to advancing your career. It’s important to make sure now that you’re not only on the right career path, but also realizing your full income potential. Do some research. Find out if an advanced degree or continued professional training will help bolster your career. Don’t be afraid to make a carefully planned change if necessary.
Evaluate your budget. The budget you created in your 20s likely will need to be tweaked to accommodate changes in income and expenses, a growing family, and new goals. You may need to cut spending in some areas to cover needs in others.
If you have children, this is a good time to start saving for college. Research college savings plans and the pros and cons of each. However, you only should do this if you’ve succeeded in paying off your debt, your emergency fund is in place, and you’re where you should be with retirement savings.
You also might want to look at insurance. If you have a family, you should set up life insurance to protect your dependents’ financial security. Another valuable option, if you can afford it, is the purchase of short- and long-term disability insurance so illness or injury won’t put you and your family in financial difficulty. Research all insurance options and rates thoroughly.
Your 40s and 50s: An Eye on The Future
If your job comes with a retirement plan, try to make the maximum contributions possible for employer matches. Even if the investment doesn’t profit, your fund will benefit from the money your employee puts in.
It’s also important to make contributions to an individual retirement account, or IRA. People in their 40s can contribute up to $5,500 to a Roth or traditional IRA. Keep in mind, if you will need $80,000 a year to live on when you’re retired, you’ll need approximately $2 million saved.
This is also a good time of life to look at your investments. Each of them should be tied to a goal. The money you invest for a short-term goal, like a home renovation or your child’s college tuition, probably should be in a more conservative account than long-term goals like retirement.
As you get closer to retirement, however, your emergency fund should comprise one to two years of income. If the economy takes a downturn after retirement, you’ll have that money as a buffer.
60-Plus: Retirement and Beyond
When you hit your 60s, you’ll need to determine if you’ll be able to comfortably retire, and – if you can – set a target retirement date. This date can be flexible. If you need or want to work longer, you always can adjust your timetable.
Look into long-term care insurance. The longer you wait, the more risk you have for an illness or condition that could disqualify you from a plan or make it too costly. Plus, rates jump up considerably in the 65-70-age range. Research plans carefully and look for plans with strong financial ratings.
Budget for medical expenses. The 2004 National Health Survey estimated that those age 65 and older spend $4,888 per year on health-care expenses.
After retirement, you’ll need a new budget. You’ll no longer be setting money aside for savings, but it will be extremely important to make sure your savings, Social Security and pension income match up with your expenditures. Keep in mind, you shouldn’t withdraw more than three or four percent of your retirement savings the first year. The earlier you retire, the more stringent you’ll need to be with your savings.
Remember, regardless of the stage of life you’re in, you’ll want to avoid debt, budget carefully and have money set aside for emergencies.