TLDR: You’ve received a windfall in your 30s and you don’t want to screw it up. Follow these 6 basic steps to get started.

In this post, I’ll assume you’ve received a substantial windfall in your 30s and that you want to ensure you don’t blow this opportunity to set yourself up financially. You’re in the right place. As a professional in your 30s, you most likely have a lot of goals and objectives that are competing for those dollars and you likely have access to a variety of savings and investment options like a 401k or 403b, Traditional IRA, Roth IRA, maybe an HSA, potentially a 457 plan, and definitely regular brokerage accounts. In this post, we’ll provide you with 6 basic steps you can follow with your windfall to ensure you’re making the most out of these dollars. For simplicity’s sake, I’ll also assume this sum is after-tax and that you’re all settled up with the IRS!

Step 1: Assess Your Financial Situation

Before diving into the exciting stuff like investments, take a step back and evaluate your overall financial picture. Consider starting with:

a) Establish Your Emergency Fund: Ensure you have 3-6 months’ worth of living expenses in a liquid, accessible account like a high-yield savings account or money market fund. This fund acts as a safety net during unexpected events and keeps you from being forced to take on high interest rate debt or liquidate other assets at inopportune times.

b) Pay Off High-Interest Debt: If you have any high-interest debts, such as credit card balances or personal loans, prioritize paying them off. These debts typically carry higher interest rates than potential investment returns, making debt repayment a wise financial move.

c) Treat Yourself: Set aside a small sum of money (how much obviously depends on the size of the windfall) and treat yourself to something fun without concern for being maximum responsible with those dollars. We’ll do that with the other 90% – 95% of the windfall money.

Step 2: Optimize Tax-Advantaged Accounts

Utilize your tax-advantaged accounts efficiently to minimize tax liabilities now and in the future so you can maximize your long-term wealth

a) Max Out Your 401(k) or 403(b): Contribute the maximum amount allowed annually ($22,500 as of 2023). If you can’t max out this account, ensure you’re at least contributing enough to receive the full employer match.

b) Health Savings Account (HSA): If eligible, consider contributing the maximum allowable amount ($3,850 for individuals, $7,750 for families in 2023). HSAs offer triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. Simply put, these are actually the top dogs of tax-sheltered wealth building accounts!

c) Individual Retirement Accounts (IRAs): Depending on your income level and tax rate, you may contribute to a Traditional IRA or Roth IRA, or both. These accounts offer great long-term tax advantages and can be invested in various assets, such as stocks, bonds, or mutual funds.

d.) 457 Accounts: If you happen to work in a job that also offers you access to a 457 plan, consider contributing the maximum amount allowed annually ($22,500 as of 2023) as well. Importantly, you can contribute to both a 403(b) and a 457 plan in the same year and can max out your contributions to both accounts in the same year. This is a huge benefit for those higher income earners looking to cut their tax bills while saving for the long-term at the same time. Another incredible aspect of a 457 account is the ability to withdraw funds from that account before age 59.5 once you leave your job and without getting hit with an early withdrawal penalty! You’ll just need to pay income tax on the withdrawal, unless it is a Roth 457 in which case the money will be accessible tax and penalty free.

Step 3: Ensure Your Investment Portfolios are Invested Correctly

Constructing low-cost and well diversified investment portfolios is essential for long-term wealth accumulation and risk management. The most important first step is having a basic investment philosophy which can be instrumental in guiding your investment decisions. Next, consider the following strategies:

a) Diversify Across Asset Classes: Allocate your investment across many different asset classes based on your risk tolerance, goals, and time horizon. A balanced approach may involve a mix of stocks, bonds, real estate investment trusts (REITs), and other assets.

b) Utilize Index Mutual Funds and Exchange-Traded Funds (ETFs): These passively managed index funds offer broad market exposure, low costs, and diversification. Smart investors recognize that low-cost market capturing index funds outperform expensive and actively managed funds with greater outperformance occurring the longer the investment time frame. Accordingly, savvy investors should strongly consider using index funds or index ETFs as the building blocks to get the asset class exposure they are targeting within their various investment accounts.

c) Leverage Taxable Brokerage Accounts: While maximizing contributions to tax-advantaged accounts is crucial to wealth building, you’ll also likely need to invest a substantial portion of this windfall in a taxable brokerage account because there are limits on how much can be contributed to the tax-sheltered accounts listed above. While offering less in the way of tax benefits, these taxable accounts provide tremendous flexibility in terms of liquidity and the ability to access and use the money. Outside of funding pre-retirement goals, these accounts can also help bridge the gap between early retirement and 59.5 when you can withdraw money from your retirement accounts penalty-free. It’s possible, or even likely depending on the size of the windfall that the bulk of your money is going to end up, at least initially, in this account. Ensuring that you align the target stock/bond allocation with your time frame for these dollars and your comfort with volatility is especially important with this account.

Step 4: Consider Fiduciary Advice

Depending on the size of your windfall and complexity of your overall financial life, seeking fiduciary financial advice may very well be a worthwhile endeavor for many people in this situation. A CERTIFIED FINANCIAL PLANNER professional like myself or a Registered Investment Advisor, like Mountain River Financial, can provide personalized and fiduciary advice that is tailored to be aligned with your goals, risk tolerance, and time horizon and do so on a fee-only basis. If you’re not 100% confident that you can effectively implement these strategies, or you’re unsure which strategies make sense for you, or maybe you’d simply like to ensure that you avoid the many (potentially very costly) mistakes along the way, it probably makes sense to engage with an expert who’s not trying to balance and execute all of these strategies and approaches for the very first time.

Step 5: Regularly Review and Adjust as Needed

Regularly review and rebalance your portfolios to ensure they stay aligned with your financial goals. As time goes on, life changes. Your goals and financial resources will also evolve. It’s imperative to recognize that a great plan today might not be a great plan next year or in 5 years. Financial planning in real life means recognizing that it’s an ongoing and iterative process that must evolve over time to be successful. Assuming what has worked getting you from a to b is not necessarily going to be what works in terms of getting you from b to c. Remember that sound financial planning is a truly journey, not a destination.

Step 6: Get Out There and Enjoy Life

Successful financial planning is about much more than just saving and investing for the future. It’s about striking the balance between thriving in a rewarding and satisfying life today and saving and investing responsibly for your family’s tomorrow. Now that you’ve done the boring but responsible stuff with your windfall, be sure to get out there and enjoy life with those family and friends that you cherish the most so you can thrive today!

If you’d like to set up a time to discuss your situation, or you’re simply interested in learning more, please don’t hesitate get in touch.

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Robert Stromberg, and all rights are reserved. Read the full Disclaimer