Turning 30 is a big deal. It’s the decade in your life where you typically start a family, make significant advancements in your career, and build wealth or acquire assets like a new house. It is also a time when most people start to get their financial house in order.
Once you reach 30, you should be saving between 15-20% of your income. If you’re an employee, you will have 9.5% of your salary contributed to your superannuation. However, you can’t access this until you’re retired, therefore it’s important to set aside some cash for emergencies that you can easily access.
How much? Ideally it should be equivalent to three months of your living expenses. If you don’t have an emergency fund, it’s likely that you’ll incur some debts during a financial downturn (usually caused by redundancy, illness or injury).
Your 30s is an important time to avoid what I call ‘lifestyle inflation’, which happens when you increase your spending with every increase in salary you receive. Your 30s marks a time of rapid career advancement, which usually equates to a higher salary. Automate your savings plan by having a percentage of your salary directed into a ‘savings account’, rather than your ‘spending account’. These savings can be directed to an emergency fund, debt reduction, critical illness insurance, or other investments.
The Bugaboo Effect
Most couples in their 30s with young children share a similar experience. During the early stages, when you move to one income, you become more cautious about your finances. Once you get past the initial cash flow challenges, you settle into the ‘new norm’ of living off one income. Then the temptation sets in to spend lots of money on the new baby. Of course, there are the essentials – change table, a cot, etc. But do you really need a $1,500 cot and the $2,000 Bugaboo pram?
Then there are the discretionary expenses. Consider this scenario – you are shopping for new clothes for your new baby. After a while, you and your better half end up staring at your cart trying to make sense of all the items. You end up asking yourself: Are we going a bit overboard here?
If you’re asking the question, the answer is most likely ‘yes’.
I’ve been there myself. You need to acknowledge that your child doesn’t care if they wear brand name clothes. Be honest with yourself and accept that you are making these purchases to feed your own sub-conscious beliefs. Maybe you want you and/or your child to be accepted into certain social circles and you believe that having certain brand names will facilitate this process. Maybe you didn’t receive nice things or have brand name clothing when you were a child, and you don’t want your child to have the same experience. Whatever the reason, you need to accept that these are ‘nice to have’ purchases, and need to be treated as such.
It’s time to become a ‘real’ adult
When you reach 30, you may have a promising career, car, superannuation account, house, or even an investment property (don’t worry, this is rare at such a young age). Whatever stage you’re at, it’s likely that you’ve built up some experience in dealing with financial matters. It’s essential to continue to build upon this financial experience during your 30s, as it’s often during this decade that some of the largest and most costly financial mistakes are made. As your salary and debt increase, so do the complexities of your situation. It’s at this point where you need to engage with professionals to plug the gaps in your knowledge. This typically involves an Accountant and Mortgage Broker as the first step, followed by a Financial Planner. You need to make ‘real’ adult decisions like purchasing life insurance, and drafting an estate plan including a Will. Taking the DIY path is fraught with danger, not to mention you have much better ways to use your limited spare time than to spend days completing tasks that would take a professional just a few hours.
So, here’s a list of top 10 money mistakes that 30-something couples should avoid:
- Getting married without discussing finances. Money is a sensitive topic to a lot of people, but once you reach your 30s it’s time to be more mature when handling difficult conversations with your partner. As a couple, you must be on the same page when it comes to money matters. If not, it will surely lead to recurring disagreements. Before tying the knot, try to be more open when it comes to discussing finances with the person whom you wish to spend the rest of your life with. Make it a habit to develop monetary goals together.
- Too much spending on ‘nice-to-have’ items for your kids. Perhaps every parent commits this mistake. It is only natural to want to shower your children with nice things. When you compare yourself to other parents, you seem to buy less….still, what you buy is likely more than enough for your kids. It’s hard to imagine the amount of money people spend on clothes, shoes, toys, and even educational toys. It’s not a matter of being able to afford them; it’s more about practicing wise spending habits and investing more quality time with your family, rather than working yourself to the bone just so that you can shower your children with nice things. They would much rather spend time playing with you.
- Too much debt. Perhaps you’ve heard excuses like: “We were paying off our debt, but then we started a family and moved the mortgage to interest only repayments.”
Life is full of uncertainties. Some new emergency will come up and if you elect to ignore your debt, it will become a big hindrance to pursuing opportunities that could potentially improve the quality of your life as a couple. It is therefore essential to take charge of your debt. Earn and save as much as you can, budget wisely, and pay your debt off. Boring advice, I know, but your future self will thank you.
- The ‘upgrade’ effect. A lot of couples decide to move when they have kids because they’ll need more space for their growing family. Most take the same approach with their preferred car, trading their ever-reliable hatchback for a new 4WD. This all makes sense to a certain point. However, what I generally see is people spending huge amounts of money on brand new 4WDs just before they move to one income. Then, they upgrade that car in 2 or 3 years’ time to a more recent model. Do you want to know the secret of how they can afford it?
The secret is, they can’t afford it.
They generally take out personal loans, redraw on their mortgage, or enter a lease to borrow the money. Second hand cars still with a factory warranty tend to be better value purchases. According to Choice magazine, a new car typically loses 45% of its value in the first 3 years.
- Keeping up with the Jones’. Talking about massive homes and new cars, people continue to be obsessed with keeping up with the Jones’, and it seems to be more common among young families in their 30s. Perhaps it’s the longing to be accepted in social groups, or to confirm your economic status amongst your peer group. Regardless of the reason, it is important to keep your spending well within your means, avoid lifestyle inflation, and save for your financial future.
- Not having enough insurance in the event of illness or injury. The only person who cares about safeguarding your family’s finances is you. Your superannuation fund may include some life and long-term disability insurance, however you should determine how much YOU actually need, then do the same for income protection insurance. It’s always a good idea to take personal responsibility,do your own research,and don’t just rely on your super fund’s default cover.
Moreover, if for some reason you decide to change jobs and superannuation funds, you may lose your insurance, and replacing it may be more expensive. Bear in mind that long-term disability insurance is more affordable in your 30s than it is later in life. If you are young and healthy, it’s an easy process to secure personal insurance. If you wait until you are older and have some historic or current health issues, you will either pay more, or not be offered any cover at all.
- Not having an Estate Plan. After a couple have their first child, I often say to them, “You now have responsibility over another little human being. You probably feel like a ‘real adult’ now. It’s time do a very adult thing – draft a Will and Estate Plan to make sure this little person is looked after should something happen to both of you.”
Having a basic Will is generally not sufficient if you have young children that you want to leave assets and money to. Just think of a 3-year-old child inheriting your house and the proceeds of your life insurance policies. It’s a recipe for disaster, and they could potentially be taken advantage of financially and/or incur a huge tax bill.
A full Estate Plan often involves the establishment of a Testamentary Trust which ensures that the proceeds of your estate are passed on to your children in an orderly, tax effective manner that will allow their new guardians to pay for their education and living expenses, until an age that you nominate, when you believe they will be mature enough to control the remaining proceeds of your estate (usually 21-25 years of age).
- Not monitoring your superannuation. You may have started your superannuation contributions with the fund that your employer offered as a default. If you’ve done that, then you’re part of the majority. However, have you taken some time to sit down and determine if your superannuation fund is the most appropriate fund for you?
Further, have you made the necessary adjustments based on your goals and risk tolerance?
In case you need professional assistance, now is the perfect time to work with a reputable financial planner and determine if you’re on the right track
- Diversifying your sources of income. In your parent’s day, the norm was that if you stayed loyal to your employer they would take good care of you. Back then, most people stuck to one job for the entire duration of their working life.
As you know, that is no longer the case. You need to find ways to diversify your income. Generate cash flow from sources separate from your job. For instance, if you have a hobby with a potential to make money, then pursue it. Consider investing in income producing assets such as property and shares. In addition, losing a job is common, considering the volatility of the local and global economy.
- Not setting and monitoring your financial goals. Any major change in your lifestyle requires you to revisit your financial goals. Typically, taking out a mortgage, extending your mortgage to buy a bigger house, and moving to one income after the birth of your first child, are the times when couples in their 30s pull out the spreadsheet or calculator to re-set their budget and financial goals. Unfortunately, most planning finishes at this point. The years that follow see lots of couple’s flounder financially, and fall victim to lifestyle inflation. Your goals need to be reviewed, and progress toward these goals needs to be constantly monitored. Many couples choose to partner with a financial professional to help them with this process.
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At Assure Wealth we specialise in helping busy, successful families structure their finances to achieve peace of mind. Author: Pat Casey – Managing Director & Financial Planner, Assure Wealth
To find out more, visit us at:www.assurewealth.com.au