The relationship you create and have with your personal finances is a marathon, not a sprint. And improving your net worth is no different. There are certainly some common habits, and tips and tricks that will always be healthy and applicable, but the truth is, your relationship with your money needs to also evolve as your life does. Throughout the different stages of your life, your money moves will ebb and flow, or at least they should, if you want to optimize for the highest possible net worth.
Breaking down your goals by age and life stage is a great way to not only create benchmarks for yourself but also to create manageability. Often people will speak about building wealth in broad terms, save for retirement, invest in stocks, have a budget. While these are all valuable anecdotes, they leave a lot of room for interpretation. If your financial savviness leaves a lot to be desired, you might spend your whole life working towards a goal, and reaching it, but missing out on opportunities simply because you did not breakdown your goals into more detailed bits.
As a 20-something you will be expected to begin your net worth journey but there is not always a lot guidance offered regarding exactly how to do that. As you begin your career and start to earn your first adult paycheck your financial habits can do one of two ways very quickly. It can be incredibly tempting to treat yourself to a new car, epic vacation, or designer clothes with what you earn from your new salary, but these treats will do nothing to grow your net worth. At this stage of life, chase the carrot. People in their 20’s typically have energy, passion, and drive to use this to your advantage and hustle hard.
Your benchmark here should be to simply grow your income. You may be eager to leave your mark on the world and follow your dreams but consider fulfilling that part of your life with things outside of work if you are unable to find a career that both incorporates your dreams and pays you a livable wage. Save the stock market for later in life when you have some excess money to play with and instead stay the traditional course at this point and save as much as you can, and do not forget about your 401k.
At this stage, you should care because you are cultivating your relationship with your finances. You are creating and building upon habits that will stick with you as you enter subsequent life stages, and you want to avoid liability and self-sabotage at all costs. You should also care because this is likely the stage of your life when your responsibilities are at their lowest they will ever be as an adult. Take advantage of your opportunity to live lean while you do not have a family to support, a mortgage to cover, or health issues that can drain your finances.
This decade is a great time to focus on things like debt management and boosting your emergency fund. Monitoring your credit score and your debt-to-income ratio should hold a high priority at this stage. Your credit score is the key that will either unlock, or lock, the door of opportunity for you so you should protect it at all costs. Pull your credit report annually and go through it with a fine-tooth comb. Seek out resolutions for any discrepancies and analyze the data to help you improve your financial health and revamp any habits that are costing you your good standing.
In your 20’s you might not have been earning enough to be able to create and contribute to a significant emergency fund, but your 30’s will present a good opportunity for this. Determine your cost of living for no less than three months and up to a full year, and have that amount saved and left untouched unless a true emergency presents itself. An emergency fund not only protects your finances it also gives you options to make life choices that are hinged on money. For example, if you are feeling trapped in a toxic work environment you may not feel comfortable to leave when you need to because you need the money.
At this stage you should care because the carefree style of life in your 20’s may not be your reality anymore. If you have made the decision to have a family, or buy a home, you are now financially responsible for people and things beyond your own self and your money needs to be able to support these responsibilities. Regarding your emergency fund, you should especially care about this because that safety net can relieve financial stressors in your life and building this extra savings account will contribute to your overall net worth.
Your 40’s and Beyond
At this point, shift your focus towards diversification, maxing out retirement efforts, and keeping debts under control. Diversification is a risk management strategy that mixes a variety of investments within a single portfolio. Doing this can help you grow your net worth, without necessarily putting it at risk. You will yield higher long-term results and set yourself up to have your hard-earned money work for you once you stop working.
Simply just contributing to your 401k at this point is not going to be aggressive enough to secure a realistic retirement fund. Look into IRA opportunities on top of your investments, as well as accounts to keep your money in that will earn you compound interest. You should also start to think about your post-work life in more detail than you previously have. Think about where you may want to live, if life insurance or a HAS is right for you, and what retirement will mean for any financial dependents in your life.
You can also use a life insurance policy to boost your retirement savings. Some people sell their policies and use that cash to fund their life during the period between retirement and death, instead of having that cash go to beneficiaries with the holder passes away. Companies like Apex Life Settlements offer free online settlement calculators that can help you asses if this is a worthwhile option for you with no commitment or risk.
At this stage you should care because you are getting over the hump of your life as a working professional. Even if you work into your 60’s and 70’s your pace will likely be on the decline. Meaning, you are going to want to dedicate more of your life to everything your sacrificed in your 20’s, like travel, kids, material goods, etc. So, it is essential to have your money work for you at this stage of life so that you do not have to work as hard for it.