If there’s one decade where life changes most dramatically, it’s in your 30s; you might get married, buy a home and have children. You may need to upgrade your car to a pricey minivan and then there are after school extracurriculars to pay for, birthday parties to throw, trips to take and so on. Simply put, your 30s are busy–and expensive. Fortunately, it’s also the decade when most people settle into their careers and start making some money.
Still, saving can be difficult when there are so many competing priorities for your dollars. That’s why it’s important to create specific goals, says Norman Raschkowan, president and portfolio manager at Toronto’s TenSquared Investments. And he doesn’t necessarily mean retirement goals. For most early 30-somethings it’s short-term goals, like buying a house or planning a wedding, that are the big concerns.
If you are saving for a home, then your portfolio mix should be determined by your timeframe. Need a down payment within five years? Then consider putting your money in guaranteed income certificates (GIC) and dividend-paying stocks or exchange-traded funds (ETFs), says Raschkowan. The trick here is timing your GIC to when you’ll need money. If you know you’ll want to buy in about a year, purchase a six- to 12-month GIC. If you’re not sure, and feel you have some time, a three-year GIC will give you income and stability while you decide your next move. Avoid bond funds: if rates rise, which is what has been happening, the value of those assets could fall.
On the equity side, dividend-paying stocks and ETFs are better than growth securities for short-term needs. They tend to be in more stable sectors, like consumer staples and utilities, and dividend-paying stocks provide payouts that can help increase your down payment. For stock pickers, stick to more established payers, though, like banks or telecoms, Raschkowan says. A tech company like Cisco for example is established, generates strong revenues and has a 3.5% yield, he says. “You want to see a record of earnings and dividend growth and attractive cash flows.” Also, take the cash instead of reinvesting, Raschkowan says, since you’ll need to use the money. Before buying any stock however, make sure its situation hasn’t changed in an important way and that it’s right for your portfolio.
Also consider keeping investments in a TFSA instead of an RRSP. Many 30-somethings still aren’t making enough money to warrant putting cash in an RRSP, explains Raschkowan. An RRSP works best if you’re in a high tax bracket and you know that you’ll be in a lower bracket in retirement. “The best strategy is to put any surplus capital into your TFSA and then remove it when you’re ready to buy your home,” Raschkowan says. “Generally, someone in their 30s will better off using a TFSA.”
As you accomplish your big life goals, you can start increasing your investments. Once you do start earmarking money for retirement, you can take more risk and buy growth-oriented stocks or increase your weighting to equities. Usually, if you need the money within five years, you’ll want to be more heavily weighted in GICs, says Raschkowan. If you have more than five years, you could put 70% of your assets into equities.
One of the aims for 30-somethings should also be to get comfortable with investing. Scott Plaskett, CEO of Etobicoke-based Ironshield Financial Planning, suggests taking some money, even if it’s $100 a month, and investing it in a long-term equity-focused portfolio.
The point is to better understand your risk tolerance. At 30, you have plenty of time to recover from a setback. Still, if you feel queasy after the market falls by 10% you can adjust down our risk tolerance. But you won’t know how much risk you can really stomach if you’re not testing the market waters. “You need to get experience,” Plaskett says. “Learn what it means to have risk in a portfolio.”
As you get more comfortable you can increase those monthly investments. By the time you’re exiting the decade, you should feel comfortable with investing and market swings. You might also start branching out into different types of investments, like alternative asset funds. When you hit 40, you should be well on your way to investment success. “The volume should be turned to 11 and you should know exactly what you’re on track for,” says Plaskett.