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Financial Advice for Your 30s and 40s

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Financial Planning Throughout Your Life

This is the second in a series of articles about financial planning throughout your life. The first article focused on financial advice for your 20s, when you've gained the education and/or skills you need for the career you've chosen, and you're earning money and learning how to handle it. The article discussed identifying goals and budgeting, saving, and investing to meet those goals. The next article focuses on financial advice for your 50s and 60s.

EVALUATE YOUR PROGRESS AND ADJUST ACCORDINGLY

By the time you're in your 30s, you're usually settled in a career, although you'll probably change jobs a number of times before your retirement. You're likely to have a family of your own, with all the accompanying expenses such as various activities or lessons for your kids, family vacations, saving for your kids' college educations, buying a new home, etc. You should have an emergency fund equal to six to eight months worth of expenses as a financial safety net to protect your assets in case of an illness, disability, job loss, or other unforeseen event.

Throughout your 30s and 40s, you should regularly evaluate your progress towards achieving the medium- and long-term financial goals you set in your 20s. Make adjustments to your spending, budgeting, and saving as needed to ensure that you stay on track. There will be many demands on your income, but it's important to build your long-term investments despite these immediate demands.

SAVING FOR YOUR KIDS' COLLEGE EDUCATION

If you're saving for your kids' college education, the earlier you start the less you'll have to save. Let the power of compounding pay for a good size chunk of the expense by starting to put funds away when your kids are very young. For more information about funding a college education, see "Financing Your Child's College Education."

SAVING FOR RETIREMENT

Hopefully by the time you're in your 30s you're well-established in your employer's 401(k) or other retirement plan. Many experts recommend putting 10% of your income towards your retirement, but this is an average. Depending on your income and fixed expenses, you may not be able to contribute 10%. On the other hand, it may make sense for you to contribute more than 10%.

Take advantage of your employer's 401(k) plan or other tax-deferred retirement plan. Your contributions will be made with pre-tax dollars and taxes on earnings will be deferred until you withdraw them during retirement. Even better, many employers will match all or part of your contribution, which results in huge gains for you.

If you change jobs, don't make the mistake of taking possession of your 401(k) plan investments. You may be able to keep your funds in your employer's plan or roll them into a new employer's plan. If not, you can always set up a bridge IRA specifically for this purpose. If you take possession of the money rather than rolling it directly into another plan, your plan administrator is required to withhold 20% for taxes and if you don't put the money (including the withheld tax amount, which may be difficult for you to come up with on short notice) into a qualified retirement plan or IRA within 60 days, you'll also have to pay a 10% penalty on the total withdrawal.

Your 40s is a good time to estimate how much income you'll need to live on after retirement. Keep in mind that people are retiring earlier and living longer, so you may need more money than you think. Will your mortgage be paid off by then? If so, you may need considerably less income than you do now. Do you plan to buy a vacation home or travel extensively? How much money will be required to do this? After you retire, you may have to pay for your own health insurance, which can be very expensive. Have you factored this into your estimates?

By regularly reviewing your spending, saving, and investing habits, you can keep on track for a secure financial future.

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