Maximizing Wealth in Your 30s and 40s: A Step-by-Step Guide

Maximizing Wealth in Your 30s and 40s: A Step-by-Step Guide

In this episode of The Retire Early Retire Now podcast, host Hunter Kelly, a certified financial planner and founder of Palm Valley Wealth Management, addresses a critical question for high-income earners in their thirties and forties: 'Where should my money go first?' Hunter outlines a clear and effective order of operations to optimize tax benefits, compounding growth, and retirement flexibility. Steps include ensuring you meet your 401k match, eliminating high-interest debt, establishing a fully funded emergency fund, maximizing contributions to retirement accounts (including Roth IRAs and HSAs), and using a taxable brokerage account for additional financial flexibility. Kelly also discusses the benefits of 529 plans for college savings and shares a client case study to illustrate practical application. The episode emphasizes the importance of having a plan and purpose for your finances to achieve financial independence and possibly retire early.

00:00 Introduction to the Podcast
01:21 The Importance of Retirement Planning in Your 30s and 40s
03:17 Step 1: Maximize Your 401k Match
04:58 Step 2: Eliminate High-Interest Debt and Build an Emergency Fund
07:45 Step 3: Advanced Retirement Contributions and HSA Benefits
11:09 Step 4: The Power of a Taxable Brokerage Account
15:24 Step 5: Planning for Your Children's Education
16:40 Real-Life Case Study and Final Thoughts

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Transcript

0:00

And welcome back to The Retire Early Retire Now podcast. I'm your host, hunter Kelly, certified financial planner and founder of Palm Valley Wealth Management. Today we're tackling one of the most important, most common and most confusing questions for high income earners in their thirties and forties. Where should my money go first? This is a very common question that I help new prospective clients answer. I come up with a plan to help them answer this because. Lots of times they have excess income each month and they just don't know what to do with it. Most people are doing something, they're contributing to their 401k Roth IRA, maybe they're doing a back to a Roth if they're getting real, real spicy, or, they're contributing to a brokerage account, but they have no idea if what they're doing is the right something. Right? so today I'm going to give you a. Simple, clear, repeatable order of operations. I walk through with clients, a roadmap to maximize tax benefits, compounding growth and retirement flexibility during the most financial, powerful decades of your life. And before we jump in, if you like this podcast and you want to help this podcast. Take 10 seconds, leave a five star review on your favorite podcasting app and share this with a friend. It helps more people, more families find the show and helps us continue to grow this community. All right, let's jump in. So your thirties and forties are incredibly important for retirement planning. Arguably the most important, but there's a caveat to that. They're arguably the most difficult and probably the most challenging. Because you have so many things going on. You've been in your career for a handful of full of years. Maybe you're starting to make real money or what you feel like is real money. And you want to start saving, but you have, maybe you just bought a house, you have kids, you have daycare. your career is super demanding. All these things are happening at once and it's easy to lose focus on. Taking the time to know exactly what you should be doing to helping you build wealth to financial independence. Because whether you want to, I'm assuming because you're listening to this podcast, you want to have the opportunity to become financially independent and hopefully retire early. Or if you don't, you're gonna have to at some point, right? So we all have a retirement date. Some of us know exactly when we want that to be, and some of us have no clue, but we are going to have that retirement date, right? it is incredibly important that you get off to the right foot in your thirties and forties. And so with so many demands, it's easy to spread money into 10 different directions and hope for the best. And so what I want to talk about today is. The order of how you do this, because that's what really matters. Putting the money in the right accounts, the right amounts in the right sequence can easily mean six or seven figures more by the time you hit retirement, right? So whether that's, putting it into a certain accounts to, to help on taxes. We're picking the correct investments, things of that nature, these can all make a material difference later on down the road. Whether that mean retiring earlier or having more of that spending money and living a more lavish retirement once you do decide to retire. So let's walk through the order of operations, step one. And this should be no surprise to anybody, and that is making sure that you're hitting your 401k match, no exceptions, right? This is free money, or you could just see this as this is part of your compensation package at your employer, right? So if your employer offers a match, whether that be 1, 2, 3, 4, 10%, whatever that is your first step. Every single time, no exceptions, it's free money or extra compensation, however you wanna look at it. So a hundred percent match on the first three to 6% of contributions is one of the best returns you'll ever get. I cannot guarantee a hundred percent return on your money. And nor can anybody else, unless they're in your employer and they're gonna say, Hey, we're gonna give you. A hundred percent on that three to 6%, right? So if they match 4%, you contribute four. If they match six, you contribute six. Right? So, know, what your match is and how to, make sure that you're maximizing that, even if you prefer Roth or taxable or real estate. Take the match and a lot of times in those 4 0 1 Ks you can still contribute to the raw side of the 401k and receive that match as a pre-tax contribution. So skipping the match is like saying no to guaranteed a hundred percent return. it seems silly and absurd because it is, right? So go ahead and get that match. I know that doesn't necessarily jive with some, financial gurus. But, it's free money. And again, it's a hundred percent return on that money. So it's the foundation of the order of operations. Number two. Step two, if you have high interest debt. And you or you do not have an emergency fund. These are the next two things that you need to make sure that you take care of. So before your foot hits the gas on any long-term investing or brokerage accounts, or crypto or any, anything crazy like that. We need stability. And one of the easiest ways to get stability is to eliminate high interest debt, credit cards, student loans, personal loans, high interest rate, auto loans. All of those certain sort of things need to be paid off, right? And if you're a high income earner and you have that extra cash flow, this could be an easy, couple of months of paying it down. If you're needing to make big changes, it could be a more long term deal, but you need to have a plan to eliminate this debt. It is going to erode away at your returns over the long term. So make sure that you pay it down. And number two is make sure that you're building an emergency fund, right? So the most common thing is three to six months for most families. You can go toward the lower end if you have a steady income. If your income fluctuates from month to month, then you want to go toward that six month. and just keep that in mind. And so this is not the most glorious step. It's not the sexy, pick this stock or do this tax planning thing that's gonna save you a bajillion dollars when you write off your Lambo. I'm kidding, by the way. but it is the one that prevents panic selling. Early withdrawals, borrowing from your 401k and then getting you back to ground zero because you had an emergency. And now I had to wipe out, all of the savings that I had because I just didn't have enough or whatever. it is very freeing. Knowing, when you have three or six or whatever amounts of months, just stashed away and you can just focus on investing. I can remember, personally when I hit that number, it was like, oh. I literally, my tire could blow out. I could blow a transmission. My AC could go out. All these things would be a big pain in my rear end, but they would not wreck me financially, right? I wouldn't have to go out and get a loan. and all those sorts of things to pay for these potential emergencies. I could just, pull from that emergency fund, pay it off, and then go back to, refilling that up and then get back to investing. Fairly quickly, right? it is a freeing moment. we'll kind of loop back to this here in just a little bit. but the first step there is getting that, high debt, high interest rate debt paid off, and, making sure that you have a fully funded emergency fund. So once you have that. Solid foundation. This is where the fund starts. This is where, the glamor, the fun things, the tax efficiency, and investing where you can start really playing those games, starts to happen, right? And so first thing we want to think about is, okay, we're getting our match at our 401k. We don't have any debt or very little debt. We have a fully funded emergency fund. What do we need to start doing? To make sure that retirement is taken care of, right? Because this is what the podcast is about. Now, you may, this may vary a little bit from person to person, depending on your situation, but for the vast majority of people, this is gonna make sense, right? So we want to go back to retirement because if you're a high income earner, most likely the match that you're receiving at your employer is not gonna be nearly enough, for what you need to start saving for retirement, right? We want to go, okay, what do I need to start contributing to first? and so generally I would say, let's go back to, the 401k, right? Depending on your income, you may not be able to directly contribute to an, Roth. IRA. And so the 401k might be that first option, right? So we wanna start looking at just retirement plans or retirement accounts. The next thing would be maxing out that Roth IRA. And so if your income is at a certain point where you have to do what's called the backdoor Roth contribution, you may have to, kind of finagle that in through non-deductible contributions to your IRA. Doing the conversion, things of that nature. But we wanna make sure a lot about what we call asset location and all that is a fancy word of saying we need to have, money in different tax buckets, right? We need to have some Roth money in a bucket. We need to have some pre-tax in a bucket. We need to have some after-tax dollars in a bucket so that we can have more flexibility later on down the road. The next thing we wanna look at is HSA, right? So if you have a high deductible health plan, HSA can be that triple tax unicorn, right? You're gonna get the tax deduction going in. You're gonna get the tax deferred growth, while it's invested, if that's, something that you're doing inside that account. And then if you have medical expenses, you're gonna get tax free withdrawals. So this can be a huge advantage to you from a tax standpoint and a wealth, accumulation standpoint. oftentimes I will tell clients if they have the cash flow, to keep receipt of the invoices that they're paying for their medical bills and don't use that. would rather see them invest it. Because you can always reimburse yourself later down the road. And that means a year, five years, 10 years, 20 years, you can always, reimburse yourself later on. So you can allow this stuff to continue to grow. and that could potentially be, a supplement for retirement income or medical bills down the road. So use that cashflow, if it makes sense. For you to use that cashflow now, to pay for those medical bills and that, let that HSA build up tax free, over time so that you can use that in your, sixties, seventies, and eighties for either. Healthcare related expenses or for retirement, because once you turn 65, you can start taking that money out. You'll have to pay taxes on that, but you could certainly use that for retirement as well. And so there's more flexibility. So this is one of the most powerful tools, right? So we've talked about contributing to our retirement accounts. So we talked about contributing to our HSAs. the next thing. What we would want to do is look at a taxable brokerage account, okay? Some people call this a superhero account. I call this the large purchase account. And so that large purchase could be a vehicle, it could be a retirement, whatever that may be. It is for later on down the road, right? once the tax shelters are full, so you're maybe maxing out your 401k, your Roth IRAs, your HSA, we wanna make sure that we are taking some of that money. As well and prioritizing a taxable brokerage account. This account will, give you options, whether that's retiring early, taking a sabbatical, maybe starting, a business. Pivoting in your career, leaving your current job, going to a different job or starting a business controlling your tax bracket in retirement. so the benefits of a taxable brokerage account is you can put as much as you want in there, right? And it's flexible. If you've got a million dollars, you put a million dollars, you got$10,000, you can put$10,000, right? There's no withdrawal restrictions. you will have to pay, capital gains, for the money that you do, earn on there, whether that be through growth, dividends, things of that nature. the, those rules are a little bit different from retirement that we've gone over in previous, podcasts. But, you do have full flexibility and access, and that's the beauty in this account. And just like with. The emergency fund starting to build this taxable brokerage account to a point where there's a significant amount of money in there relative to your net worth and things of that nature really gives you a sense of freedom, right? just think about it, if you have three or five, or even if you've done really well, 10 years worth of, Dollars, 10 or 10 years worth of salary in this account. Like how freeing would that actually feel, right? Like at that point it's Hey, if someone, if I change my mind and I don't really like this profession, someone makes me mad, whatever, I can walk away and I'm secure for an extended period of time to allow me to pivot and go do something else, right? And so having this account fund it in a sense where I have. 2, 3, 4, 5 years worth of, salary in there extremely freeing. and so personally and candidly, I'm working toward that, right? I don't have five or 10 years worth in there, but I am certainly building, at a point where I can really start building this account now. it is nice knowing that, hey. Again, if I have, an extreme emergency or if I want to go, buy a house in a few years, like this is that bucket that's gonna allow me to, be flexible with spending and things of that nature, right? the freedom that comes with this, that the downside, I guess, or the thing that you need to be, cognizant of is you need to have a plan with it, right? And so it could have multiple objectives, right? But you need to know what it's for, right? Because it can be like having cash in your pocket, right? You see$20,000 in there are$50,000 and there are$250,000 in there. It can be easy to go, oh, I can just pull from that. Well, what's the objective of the account? Is it to fund retirement? is it to buy a house? Is it to fund kids college? what is the objective of it? One that's gonna help you pick your investments inside these accounts. But two is gonna give you a purpose of, Hey, why am I building. That account, it should not really be touching it for the silly purchase or, or whatever, right? And so the brokerage account, I think is the most underrated, but also can be the most important account there is because it's gonna give you that ultimate flexibility and freedom. So once you have those kind of set in place, you got a good rhythm, good habits built, you're contributing to your. Your retirement accounts, maybe you have a brokerage account that you're contributing to. your debt is extremely low. You have a fully funded emergency fund. The next step is if you have kids, a 5, 2 9 may be the best, option for you.'cause that's gonna give you some flexibility. If you're wanting them to go to college and you wanna be able to fund that, there's a couple different avenues that you can go down. You can buy a prepaid plan, right? I live in Florida. Florida has a prepaid plan, and how it works is basically you're getting a guaranteed rate of return. So if your child was born in 2015, there is a You could go in and say, Hey, they're gonna start college, at this year. And Florida would give you, basically a price and say, Hey, for this package or a four year degree, it's gonna cost this much. So no matter how much, tuition increases over that time period. We're gonna guarantee you four years worth of tuition. Right? Whereas the 5, 2, 9 is more like a Roth IRA. You're gonna put that money into, this account. You're gonna pick some investments and you're gonna hope that it outpaces, what college tuition is gonna cost, right? And so kids, this is, again, much like a kids college Roth, IRA, essentially. So any growth that you're gonna receive inside this account, will be tax free, when you take those distributions for qualifying educational expenses. so this would be a great, account for your kids' college. Here is a real breakdown from a couple in their late thirties. Earning about$275,000 a year. So I started working with them. they were already working on their employer match. they, the husband had just gotten a large raise. they had paid off some student loan and they came to me and said, Hey, I don't know what else to do with this extra money. And so I know that we have these goals. I wanna be retire, be able to retire early. We're looking to have kids here very soon. they were going through IVF, so there was gonna have a cost associated with that as well. some of the things that, that I helped them do is come up with a plan on, okay, where do we put this extra money? Right? And so for them, we knew that they would have some expenses for IVF, so we made sure that, they, Had an HSA that they were contributing to, that they could help, subsidize some of that, that, cost there. we worked on contributing, increasing their con contributions to their 401k, and then we were adding some money to their taxable brokerage account. One, for more long-term expenses that they were planning on, and then two, kind of as a, pseudo extra emergency fund because they knew they had, Desires to have a child, but they want it a little bit more return than what their, their checking account and savings account would give them. So we pick some safer investments and things of that nature for that particular reason. so that is kind of like a breakdown, a 30,000 foot view, obviously way more nuanced when you meet and things of that nature. But the idea here is that you wanna have a plan and you want to have a purpose. With how you're dealing with this extra money, right? And so that is often a problem that I solve, right? they, people come to me, they say, Hey, I feel like I'm doing all the right things. I just don't know how this progress, Is this enough progress that I'm making each year to meet my retirement goals or fund my kids' college or do these certain things, right? So these are questions that I can help you answer, and I've helped multiple, multiple. Couples answer. And so if this episode gave you clarity, maybe it gave you more questions, and you're just unsure of where, some of this money should go, or if you're doing it correctly, you can always go to my website, Palm Valley wm.com. look at my website, look at my process, schedule a call. this call is always complimentary. We can have a conversation to help you kind of get on the track of, Hey, how do I start? Allocating these extra dollars to a spot that makes sense for what I want to accomplish, the goals and priorities that I have, the values that I have, right? If you like this podcast, go ahead and leave a five star review on your favorite podcast and app. Share this with a friend, to help more people discover this show and become financially independent. I'm Hunter Kelly. Thanks for listening. And remember the order you follow matters. Consistency compounds. Clarity accelerates. This podcast is for educational purposes only. It is not meant to be financial or investment advice. Please do not make decisions solely based on this podcast alone. Please seek professional help when making those decisions. I.