7 important financial steps to take in your 30s

When you hit your 30s, you may start thinking about your major life goals, both personal and financial. Although you may be able to defer some of your personal life decisions, many financial decisions can have a gradual, yet enormous, impact on your life. Making them at the right time ensures that you can meet your goals and achieve financial security.

Here are seven key financial steps people in their 30s should take.

1. Build an emergency fund

Whatever your current income is, you need to establish an emergency fund. Think about how you would pay next month’s rent if you lost your job. Or if your car broke down, would you have enough money to repair it? Having a financial buffer means you don’t have to hit the panic button — or go into debt — when faced with an unforeseen expense.

Start by aiming to save enough to cover up to three months of your household expenses and gradually grow your emergency fund to cover at least six months of expenses. If money is tight, building an emergency fund can be overwhelming, so start small. Use automatic deposits to your savings account to ensure regular contributions.

2. Make a plan to pay off debt

As you turn 30, it’s smart to think about setting a strong financial foundation for your future, and that starts with paying off your debt. Not all debt is bad. Good debt includes your home mortgage or education loan, but if you have high-interest credit card debt or personal loan debt, it’s time to take these financial matters seriously.

The best strategy is to start paying off debt with the highest interest rate first.

3. Start (or keep) maxing out your 401(k)

Unlike maxing out your credit cards, maxing out your 401(k) or other retirement plans is a good thing — and now is the time to start.

If you have an employer-sponsored retirement plan, contribute as much as you can. If you’re not yet able to make the maximum allowable contribution, you should contribute at least enough to get the matching contribution from your employer if the company offers it. This is essentially free money; don’t let it go to waste. If your employer doesn’t provide a retirement plan, open a traditional IRA or Roth IRA account. With an IRA, you can contribute up to $5,500 in 2016.

4. Start investing now

One of the biggest advantages you have in your 30s is time, so it pays to start investing early. Consider this example of two investors. At 30, Steve started investing $1,000 a month and did so until age 40. He didn’t withdraw his investment and let it grow until his retirement at age 60. Bob started investing at 40, contributing $1,000 a month until age 60.

Assuming an average rate of return of 5% compounded annually, Steve accumulated $154,992 at the end of the 10 years, but since he didn’t withdraw this money, it grew to $411,240 by age 60. Bob ended up with $407,460 with the same investment terms. This is the magic of time — and compound interest — working in Steve’s favor. .

For newer investors with a limited understanding of the investment landscape, you can invest passively through mutual funds or exchange-traded funds that are based on a broad-market index.

5. Figure out the right investment strategy for you

Asset allocation is about picking the right proportion of different investment types (or asset classes) to match your portfolio with your risk appetite, investment time frame and financial goals. For instance, if you wanted a more aggressive investment strategy, you would want to create a portfolio with more exposure to stocks, and if you wanted less risk, you’d dial up your exposure to bonds.

Your asset allocation will have a huge impact on your net wealth over time. It may be best to consult with a financial expert to come up with an investment strategy that fits with your goals and your tolerance for risk.

6. Diversify your investments

The other important part of building a portfolio is diversifying your investments. By holding a diverse selection of investments, you are able to spread around your risk and reduce overall volatility.

You may also want to start considering alternative investment options that can help you further diversify your portfolio to weather stock market fluctuations. The goal is to add investments that tend to not move in the same direction as the stock market and can offer stable returns over a longer period. Some of the most popular alternative investments include real estate, precious metals, life settlements, private debt placement or private stock.

7. Start saving for college

You should begin saving for college expenses as soon as you have a child. The sooner you start saving and investing for this major expense, the better off you’ll be. A tax-advantaged plan, like a 529 college savings plan, can help you come up with the necessary funds to support your child’s college education. Considering the long time horizon, you may want to follow a relatively aggressive investment strategy for the plan.

Take the long view

Though it may not always feel like it, you have control over your financial life. Making educated decisions and taking action early can help set you on the path to financial security and achieving your goals.

Dmitriy Fomichenko is president and founder of Sense Financial, a provider of self-directed retirement accounts. He is an advisor at NerdWallet, a personal finance site.

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