How To Save Money In Each Decade Of Life
Ageing is inevitable, so let’s explore how to save money (plus common mistakes) in your 20s, 30s and beyond.
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June 15th, 2017 by Melissa Wentzel
Is it just us, or does everyone assume we get better at money as we get older? According to Wall Street Journal reporter, Charlie Wells, we don’t. We just make different mistakes.
Let’s familiarise ourselves with the biggest mistakes we make with money, decade by decade. And then use them to figure out how to save money, better (or at all).
Who would have guessed that the current 20-somethings’ (or millennials, mostly) biggest money mistake is ‘playing it too safe’?
Wells explains that today’s millennials seem to be scarred by certain financial events that have happened over the course of their lives, e.g. the great financial crisis.
Wells says millennials seems to be avoiding risky investments that they actually need in this stage of their lives.
People in their 20s can afford to take on greater risk to potentially get greater returns.
“One study actually found that a number of millennials are taking on retirement portfolios that look a lot more appropriate for people who are nearing retirement,” he adds.
Veteran personal finance writer and author of the bestseller, Get a Financial Life: Personal Finance In Your Twenties and Thirties, Beth Kobliner, has two hard and fast rules for managing your money as a 20-something:
Kobliner says not all debt is bad and that student, home, and car finance debt could actually help you get ahead financially. But credit card debt can ruin your credit rating and affect your job, insurance, and your prospects of owning a home for years to come.
“But if you do find yourself slipping into the trenches of debt after an ill-advised shopping spree (or three) or an unexpected medical emergency that your savings wasn’t equipped to cover, pay it off as soon as possible,” says Kobliner.
Regarding saving for retirement, she says, “You don’t even have to contribute a ton of money, because as long as you start early, compound interest will take over.”
According to David Bach, bestselling author of The Automatic Millionaire, the real key to saving is the percentage of your income that you pay yourself first. In your twenties, Bach recommends contributing 10% of your gross income to retirement savings.
Bach also explains that emergency savings goals change in each decade and should double every 10 years as your cost of living goes up. In your twenties, this should be three months worth of living expenses.
In this age group, we begin to take ‘adulting’ to the next level and experience what Wells refers to as, ‘lifestyle creep’. It’s when you try leading the sort of lifestyle your parents led when you left home – not realising how long it took your parents to get there.
Thirty-somethings are overwhelmed by the complexity of their changing lifestyles (new baby, new house, new expenses, wedding debt) and end up saving too little, spending too much, and getting into a lot of debt.
Wells: “Life sort of gets in the way and people forget to make the appropriate adjustments.”
Debt is still the enemy, which can largely be avoided by living within your means at this stage. But another component to saving is adequate insurance. Especially if you have dependents (a spouse, children, financially dependent parents). But also for unexpected health events.
A good medical aid, comprehensive risk cover, funeral cover, and especially car insurance can save you from getting into unnecessary debt.
Your thirties is also the time to increase your retirement contributions (if you haven’t opted for an annual increase). Bach recommends 12.5% of your gross income at this point, but it would largely depend on whether you’ve started saving in your twenties.
Forty-odd year-olds’ biggest mistake? Sandwiching.
Nope, it’s not what you think.
People in their forties find themselves forking out finances for their children (education) as well as their ageing parents.
“The real mistake here is when people start withdrawing from their retirement savings to feed the sandwich,” says Wells.
Your forties are generally your peak earning years. Now’s the time to pay down your bond quickly so you don’t end up paying it off into your retirement. It’s also the time to maximise your retirement contributions.
It’s also a good idea to sit down with your financial advisor and review your retirement fund’s asset allocation. This is something that should as you get closer to retirement age and your appetite for risk diminishes.
Many parents sacrifice their own retirement goals to pay for their children’s tertiary education. But if money will be tight, look for compromises with minimal negative impact on retirement savings.
Wells says in your 50s, the nightmare is waking up and realising you don’t have enough money to get you through retirement. He explains a lot of people at this point realise retirement is a lot longer than it was in the past (longevity risk) and they start playing catch up. They take risky investments and start businesses to inject cash into their savings, but this is risky.
Wells says that research has found that people’s peak financial decision-making skills is around 53, and then it begins to decline. This can be due to cognitive decline and dementia.
Wells: “Your ability to make decisions is going to decline. Before that happens, delegate your financial decisions to a trusted family member or advisor. And make sure you’ve got things written down.”
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