Financial Planning in your 30’s : Here’s How to Do it
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Are you financially ready to take on your 30s? The 30s come with a mixed bag of good and bad. This is the phase in life when financial responsibilities expand. But this is also the time when your career and finances are more settled and poised to take off. Prime your personal finances so that you are ready to take advantage of this phase of your life. Here are a few ways to do so.
Make a budget
Cultivate the discipline to live within your budget. As you enter the 30s, there is likely to be greater certainty and growth in your income. But the monetary responsibilities are also likely to expand, putting a strain on your income. Being able to control expenditure is a good skill to have so that you can save and invest for your goals. But this discipline takes time to develop and internalize. Use the time in your 20s, once you have worked out the reckless spending that comes with first earning your own income, to learn to make a budget and live by it. Track your expenses over a few months so that you know where your money is going. Do a realistic categorization between essential and discretionary expenses, apart from payment of taxes, repayment of loans and some savings. Trim your expenses to fit the available income. Test run the budget over a few months and tune it according to your experiences.
Once you have a viable budget, build the discipline to stick with it. This habit will help you deal with the stress of expenses when the financial responsibilities go up in your 30s, and even later.
Ring fence your Finances
An unexpected loss or drop in income, an unforeseen medical or other emergency, or worse still, loss of life can derail the ability of a family to meet its current and future expenses. An emergency fund and appropriate insurance products can help you safeguard your financial interests efficiently at a time in your life when you have dependents and additional monetary obligations. An emergency fund should be the first financial commitment when you start earning an income. Build an emergency fund that reflects your expenses and risks to your income. Maintain the fund by periodically adjusting it to reflect expected changes, and refill it on priority basis anytime you use it.
Use insurance to protect your income from the risk of loss of life or from unexpected large expenses. For life insurance, choose a term plan that gives you the cover you need at a lower cost. You will also need health insurance to protect the family, even if there is employer-sponsored health cover.
Erase credit indiscretions
Your credit score and credit history are likely to reflect the mistakes made in managing debt early in your career. But you have time on your side to rectify the errors and rebuild your credit score in preparation for the more responsible 30s. This is the time when you may be considering large loans such as home mortgages. A poor credit score will affect the terms on which you will be able to borrow and this has a long term negative impact on your finances. The steps you need to take to rectify your score include accessing your credit report from the credit bureaus and checking them for errors. Write an application for correction immediately if you spot any errors. Once you know your credit score, and if it is low, work towards building. Work on paying off loans and don’t add to debt. Try to reduce the percentage of credit used against your available credit. If you have stayed away from debt altogether, then that too may work against you. Build a responsible credit behaviour pattern by using credit with discipline and meeting obligations on time. Rebuilding credit and building credit history is not something that you can do quickly.
Spring clean debt
Initial incomes can also be a time of indiscreet borrowing. Most of the debt is likely to be high-cost consumer and credit card debt. Clean up debt outstanding as you approach your 30s. First, the concentration of unsecured debt and credit card debt will harm your credit score. Second, if you don’t close these debts, they will affect your ability to make more serious financial commitments such as a home loan, when you need it. It will also restrict your ability to source loans in an emergency. Try to keep your debt slate clean because in your 30s, your needs may expand much faster than your income and you don’t want your ability to borrow tied up in old debt.
Start saving for retirement
You should start investing for retirement right from the beginning of your career, so that your retirement corpus benefits from compounding even if the multiple claims on your income in the 30s prevent you from adding significantly to your retirement contributions beyond the mandatory savings. Make contributions to the regulatory retirement savings offered by employers, which may have contributions from the employer as well as tax benefits. Expand to other retirement products that allow you to take more risks for better returns, given the longer period available to the corpus.
Change course and upskill
You are the most important asset in your life and you need to maintain your earning capacity in top gear. Use the initial working years to know if you like what you are doing or want to change course. Either way, use the late 20s to skill yourself. Change course if you need to, or up-skill yourself, so that your earning ability goes up in the 30s.
Focus on your investment portfolio
As income stabilizes in the 30s and an emergency fund is built to take care of any risks to income, the investment portfolio and asset allocation should reflect the investment horizon of the goals and the need for liquidity, income and growth. There may be medium-term goals such as saving for down-payment on a house and long-term goals like children’s education and your own retirement. Rebalance the portfolio to reflect changes in circumstances and goals. Set in place facilities to make automatic investments so that the expanding expenses in the 30s don’t forestall the investments that you should be making.
Set the stage for making the most of your 30s. It may seem like a lot to do but you just have to be mindful of money matters and the rest will fall in place.