This is the second of a multi-part series (also published at DefiningSomeday.com) with suggestions on what you should be doing with your personal finances. The first part of this series, Personal Finance in Your… 20s, is located here.In order to write about different ages, I am going to have to make some assumptions. I’ll do my best to make explicit my assumptions so that you can determine how well my suggestions fit with your personal situation.
Assumptions: In your 30s, you are established in your career and starting a family. You likely have some residual student and other debt associated with college or university. This is a stressful time because you are settling down, starting a family, buying a home, buying newer cars and incurring many other major costs. You aren’t at the top of your game yet, but you are making a lot more money than you were in your 20s… unfortunately, your expenses have grown much faster than your income.
Here are my suggestions for financial moves in your 30s that will set you up to be financially stable later in life (Several of these are the same as when you were in your 20s):
1. PAY OFF YOUR DEBT
If you still have lingering debt, you’ve got to get rid of that. The way to pay off your debt depends largely on the type of person you are. For most readers, I suggest paying down your debt using the Snowball method. Essentially, list all debts in order of smallest to largest. If two debts are close, then put the higher interest rate debt above. Commit to paying the minimum payment on every debt, and then start paying off the smallest debt first, working your way down the list until you are debt free.
The central benefit of the Snowball method is the psychological benefit of seeing results. In MBA-lingo, this is all about building momentum toward change.
If you are a person with a history of financial discipline, you will get ahead quicker by NOT following the Snowball method and instead paying off your debts in order of highest interest to lowest interest. This means you will pay less interest in paying down your debts.
Note that once you get to the low-interest loans, it may be in your best interest (haha a pun!) to just pay the minimum monthly payment and invest at a higher rate elsewhere. Consider also whether the interest payments you are making are tax-deductible, as this lowers the effective rate of interest you are paying.
2. DON’T ADD HIGH INTEREST DEBT
While you are paying off your debt, make sure you aren’t adding other debt just as fast as you are paying off your current debt. Cut up your credit cards if you have to. At the very least, hunt for a credit card with a lower interest rate. Buying with Credit Cards should be a LAST RESORT.
3. INSURANCE
It is time to start looking at insurance. The earlier you buy insurance, the better. The longer you wait, the more likely you will have problems (cancer, heart disease) that might make you uninsurable. If you start early, you can get good rates that are locked in, or give a guaranteed option to increase the insurance at a set rate, which allows you to increase if you get sick. Investigate life insurance options with an insurance broker or online.
4. SAVE FOR THE KIDS
As soon as you have kids, you should open an education savings account (tax deferred), like an RESP (in Canada) and start putting aside a regular amount. The earlier you start, the better!
5. RETIREMENT SAVING
If you work for a company with a share purchase plan or a retirement plan, take advantage of this. Many employers match their employees’ share purchases, which is fantastic. If your employer does not offer such a plan, ask your financial institution to set you up on a similar automatic-savings plan. The transfer of your funds into these plans is often automatic, which means the amount you are investing or saving comes right off of each of your paycheques before it is deposited in your account. This reduces the psychological hurdle of seeing that you have money in your account, and then mustering the willpower to take it out and deposit it somewhere safe where you can’t spend it. I call this manual saving, which is hard and does not produce consistent results like those you can expect to see with automatic savings.
When you get a raise, if you set it up so that the raise automatically goes into a savings program, you will just keep living like you were before, but saving more!
6. WHO CARES ABOUT THE JONESES?
Don’t fall into the “Keeping up with the Joneses” mentality. This is where you feel obligated to buy new cars, buy new homes, etc, just because other people your age are doing so. This is a surefire way to get in over your head and wind up unhappy. Make decisions because they work for you.
Check out my post on Renting vs. Buying to see if it makes sense for you to buy or rent. Too many people rush to buy when it doesn’t make financial sense.
Do you have anything to add? What advice would you give someone in their 30s?