Roadmap To Investing For 30-40 Year Olds
Written by: Jayden Scott | Advisory Team
Investing can seem like an overwhelming task when you’re trying to get started, especially for those in their 30s who are often juggling multiple responsibilities.
Whether you’re saving for a home, planning for retirement, or just looking to build wealth, understanding that strategies are available and the different approaches to investing that you can take is important.
In this article, I will provide a general roadmap as a guide on things you should consider if you’re looking to invest in your 30s.
Financial Goals + Where You Should Be Before Investing
Before you start investing, it is a good idea to look at your financial situation holistically to decide whether investing should be your number one priority right now, or whether there are perhaps some other goals/milestones you want to tick off before you start investing.
Some things to consider are:
- Building an emergency fund!
This is a fundamental part of developing someone’s financial well-being and stability, and I would encourage anyone who doesn’t yet have an emergency fund to focus on building this up first before they consider investing.
Generally, having three to six months’ worth of living expenses tucked away in a high-interest savings account is a good starting point. Life can be unpredictable, and you never know what’s around the corner. If you ever find yourself out of work and unable to earn income for whatever reason, you can have confidence that you have your emergency fund to fall back on.
- Evaluate current debts!
This can include debts such as credit card balances, HECS debt, personal loans or mortgages.
Before you start investing, make sure you have cleared any credit card debt and continue to clear your credit card consistently. Furthermore, if you have any personal loans such as car loans, you may want to prioritise paying this off first before you start investing. Once these loans are cleared, you could still have a HECS debt or mortgage, which can be impractical or unrealistic to aim to pay off before you start investing.
A regular conversation we have with our clients is whether they should prioritise paying off their home loan, or whether they should prioritise investing their money elsewhere. There is no right or wrong answer to this question as it all depends on someone’s tolerance for risk and their attitude towards debt. Some people like the idea of clearing their mortgage as they are essentially achieving a guaranteed rate of return, and they will have the security of owning their own home without any debt sooner. Other people choose to prioritise investing their money in other assets in the hope of achieving higher returns in the long term, and therefore building more wealth. However, the trade-off is that they will have a mortgage for longer which comes with more risk.
- Completing a budget!
To gain a holistic view of where your income and expenses are going.
I appreciate that completing a budget can be tedious, but often the results of completing a budget can be surprising and open your eyes to how much you are spending on certain things. From your budget, you may identify items or activities where you can cut back your spending. Reducing your spending will create a greater surplus week to week that you can use to invest and increase your wealth.
Financial Planning Your Goals + Strategy
From here, if you decide that you would like to start investing, it is important to think about what your ultimate goals are and what you want to achieve by investing your money.
The right investment strategy for someone can vary depending on their goals. If you’re wanting to invest for the long term and plan for retirement, your investment strategy will likely differ from someone investing for the short term to help fund a holiday, a home deposit, or a car.
Once you understand what your long-term investment goals are, you should then start thinking about your risk tolerance and how much risk you’re willing to take to achieve higher returns.
On a high level, you should consider things such as how long you want your money to be invested for, how stable your current financial position is, and how you would feel if your investment dropped significantly in value. There are different risk profile questionnaires available online, such as the Vanguard Risk Profile Questionnaire, where you answer multiple questions, and you are provided with a result of what your suggested investment allocation is based on your answers. It will provide a guideline for what percentage of your investment portfolio you should consider investing in growth assets, such as shares and property, and how much of your investment portfolio you should consider investing in defensive assets such as bonds, term deposits, and cash.
Are you wanting to know more on navigating investments and to see if they align with your personal values? Check out this previous blog we put together: Surplus Income Investing: Sustainable + Ethical
Investment Management: Investing In Exchange Traded Funds
If you’re starting with a small amount to initially invest, you could consider investing in Exchange Traded Funds (ETFs).
An ETF works similarly to a managed fund or unit trust but is listed on a stock exchange such as the ASX. ETFs will often be invested in a variety of securities and will typically track an index. For example, there are ETFs that invest in the top 200 largest companies on the ASX. If you purchased one of these ETFs for $100, this $100 would be invested in all the top 200 companies on the ASX in small portions.
There are two main benefits to this;
- The first: is that you can achieve greater diversification by investing in an ETF, which reduces your investment risk; and
- The second: is that you can invest in 100s of different companies with such a small amount of money to begin with.
Other benefits are that ETFs are cost-effective compared to other types of investments, as you will often pay a small brokerage fee to buy or sell the investment, and then a small ongoing investment fee that is simply deducted from the performance of that ETF. An ETF can also be bought or sold on any trading day, meaning you can sell off a portion of your ETFs portfolio and gain access to that money in a timely manner.
There are also many ETFs that are available to invest in and that can provide access to investments that are usually difficult to invest in directly for the average retail investor, such as investing in individual shares of companies overseas, investing in gold, investing in government or corporate bonds, or even property. Furthermore, you can invest in ETFs that are higher risk and invest in fixed interest and cash. The downside of investing in ETFs is that they are still susceptible to the volatility of the markets you’re invested in, meaning the value of your investment can decrease at any given time. However, investing in an ETF portfolio is a long-term investment, so reacting to any short-term market volatility should be avoided if possible.
Do I Need Financial Advice For Investing Large Sums Or An Inheritance?
If you’re starting with a large sum of money that you received from something such as an inheritance, and you want to invest this money in the long term, you could consider investing in ETFs, or you may want to look at investing in either direct shares in Australian companies or buying an investment property.
Investing in direct shares can offer high long-term returns if you invest in the right companies, but they are also quite volatile, and their value can drop significantly in a short period of time. Furthermore, if a company you buy shares in becomes bankrupt, you aren’t guaranteed to be paid back the full value of your shares in the company.
Because of the high-risk nature of investing in direct shares and the education, experience, and research required to make an informed decision, I would strongly encourage seeking professional advice from someone with the relevant education and experience if you want to develop a portfolio of direct shares. If you were looking at investing in an investment property, you would have to be mindful that it is less liquid than a direct share or ETF portfolio as you can’t sell off a portion of your investment property.
If you want to keep your investment strategy simple and you don’t like the idea of investing in risky assets, or your investment timeframe is relatively short, you could look at investing in defensive assets such as a term deposit. Term deposits involve locking your money into a bank account for a fixed term, ranging from a few months to several years.
They offer a guaranteed interest rate and are low risk since they are often covered by government guarantees up to a certain amount. While they provide safety, the trade-off is generally lower returns compared to other investment options. The terms deposits are best suited for investors who prioritise security over high returns.
You could also look at investing in government or corporate bonds through an ETF. Bonds are debt securities issued by governments or corporations. Government bonds are considered low risk since they are backed by the government, while corporate bonds come with varying levels of risk depending on the issuing company’s creditworthiness. Bonds provide regular interest payments and can be a stable addition to your investment portfolio.
Investment Portfolios
Once you have developed a diversified portfolio, it is important to regularly monitor and review your investment portfolio and adjust as required when your goals or your risk tolerance changes.
Furthermore, if your cash flow allows, you could consider setting up an automated and regular transaction into your investment portfolio. This will help develop your spending habits around the money you have left over after you deposit into your investment portfolio, which can be an effective psychological strategy to ensure you stay the course.
Getting started and creating good habits is the hardest part of investing so by starting with a solid financial foundation, setting clear investment goals, understanding your risk tolerance, and constructing a diversified portfolio, you can confidently navigate the investment landscape.
Want to understand how your investment portfolio can follow you all the way into retirement and even help set you up for it? Check out this previous blog we put together: Retirement Planning Milestones – Life Stages + Planning.
Canny Advisory + Starting Your Investment Journey
The early years of investing in your 30s are generally the hardest and it can be difficult to stay consistent and see the long-term benefits.
However, future you in your 40s and 50s will greatly benefit from your consistency now.
At that point you should start to consider seeking advice from one of our financial planners here at Canny Advisory to help navigate your preparation for retirement and maximise your retirement savings in an effective way.
Get in touch with our team to have a chat about how we can start your investment journey today.
