The 8 Biggest Financial Mistakes Individuals in their 30’s Make
Elite Financial Professionals
1. Running Up Credit Cards
If you got into the credit card habit, like many of us have in our 20s, getting out of this trap can be a serious hurdle. You may have become accustomed to using plastic to pay for what your income wouldn’t cover. That might have made sense for your younger self, but you’re older now and it’s time to break that habit. The sooner you do, the better life will begin treating you.
Let’s face it, people no longer pay with cash, I seldom carry cash on me, or checks. It’s done either with credit or debit cards. And with the generous rewards programs, that offer free miles, money back or other items, many credit cards provide, it can even seem like a wise strategy on some level.
But that’s a big part of the problem with credit cards. They’re very convenient to use, and they do provide certain tangible benefits. But they don’t call them revolving debt for nothing. At the core, they’re set up to keep you in debt. Sure, you make your monthly payment, but the balance never seems to go down.
If you don’t make a conscious effort to get off the credit card treadmill now, you may be carrying balances straight into retirement.
2. Buying a House You Really Can’t Afford
There’s a convention in the mortgage industry known as the “28/36” rule. No more than 28% of your income should go for housing, and 36% for total debt, including the house payment.
The problem is many people buy the most expensive home they can afford. The flaw in that strategy, whatever the reason behind it, is housing is a controlling expense. The more expensive the home you buy, the higher many other expenses will be. This will include homeowners insurance, utilities, and even the furniture and entertainment equipment you fill the home with.
From a purely financial standpoint, a better idea is to buy less house than you can afford. For example, instead of going all the way to 28/36, cap your house payment at no more than 20% of your stable monthly income, and your total debt no more than maybe 25%.
Not only will this allow you to save and invest more money, but it may enable you to comfortably afford your house payment if one income source is lost.
3. Buying a Car You Really Can’t Afford
This is the same basic idea as the housing payment strategy, but on a smaller scale.
For example, if you buy a car for $50,000 and finance it over five years at 5%, you’ll have a monthly payment of $944. But if you buy a $25,000 car with the same terms, the payment will be just $472, or exactly half the payment on the higher priced car.
That’ll save you $5,664 per year. Think what that could do to either help you get out of debt, or save and invest more money?
One of the best ways to do this is by buying a used car. New cars typically lose about 50% of their value within the first three years. So instead of buying the brand-new car for $50,000, buy the three-year-old version at $25,000. You’ll still be driving the same car, but with only half the monthly payment.
4. Spending Too Much on the Good Life
Part of the problem here is there are so many different spending categories. You might spend $300 eating in restaurants, $100 on movies, $200 on concert tickets, $300 on sporting events, and another $100 on miscellaneous activities. But by the end of the month, you’ve spent a full $1,000.
Even with a relatively high income, that’s still a big chunk of money.
Control this expense by setting a budget. For example, if you’ve been spending $1,000 per month on entertainment, cut that in half, and work with it. Then develop the discipline to save and invest the difference.
5. Not Investing or Not Investing Enough
If you’re making any of the mistakes on this list, you’re almost certainly not investing enough money, or not even investing at all. This is one mistake that has to change.
The time value of money is a critical dynamic, and you need to get it working in your favor. For example, if you begin investing $10,000 ($834/month) per year at age 30, with an average annual rate of return of 7%, you’ll have over $1.4 million by the time you reach 65.
But if you wait until you’re 40, you’ll only have a little over $650,000 at 65. Put another way, by investing just $100,000 during the decade of your thirties, your portfolio will be larger by more than $750,000.
Don’t wait to act on this one — the clock is already running!
6. Not Taking Full Advantage of Your Retirement Plan
If your company offers a 401k with an employer matching contribution you want to ensure you are maxing out the contribution.
Even if you don’t max out your own contribution to your plan, you should make sure you contribute the minimum necessary to get the largest employer matching contribution.
For example, if your employer will provide a 50% matching contribution up to 3% of your pay, your contribution should be at least 6%. This will give you a combined annual contribution of 9%. If you earn $100,000, that’ll be $9,000 per year.
You can’t afford not to take advantage of that benefit.
Do understand that 401k’s have rules and fees and are tax-deferred plans. You are not allowed to touch your 401k until you are 59 and a half. So if you have any financial emergency where you need access to funds, not only will you be taxed on any disbursements taken you will also get a 10% penalty. A tax-deferred account means you will have to pay taxes on your withdraws in the future when you take your disbursements. A rising question is will taxes be higher or lower in the future? That is for you to decide.
7. Not Creating a College Funding Plan for Your Kids
Not only do kids really grow up fast the average cost of college increases 6% every year. And when the time to go to college starts getting close, it’ll seem even faster. College is expensive, and getting even more so. The more you can salt away now to cover the cost, the less you and your children will need to rely on crippling student loan debt.
You have a chance to avoid that fate, but you must begin to act now.
8. What You Don’t Know Can Hurt You
What you don’t know can hurt you. This is no more important than in the world of finance and your financial future. Too many individuals in their 20’s and 30’s have a very short sided understanding about finance and investing. They only know what they hear on tv, from parents or through friends. Not taking the time to do your own proper research on all types of financial investments can and will hurt you.
One of the least talked about, yet extremely rewarding, types of investment strategies and retirement strategies is a Life Insurance Retirement Plan also known as an Indexed Universal Life Policy (IUL).
1. A Life Insurance Retirement Plan (LIRP) is essentially a life insurance policy that is specifically designed to maximize the accumulation of cash within the policy’s growth account. It accomplishes this by turning the traditional approach to life insurance on its ear. Conventional wisdom says that wen purchasing life insurance, you should purchase as much insurance as you can for as little money as necessary. With a LIRP, you are buying as little insurance as is required by the IRS while stuffing as much money into it as the IRS allows. When utilized as a tax-free accumulation tool, the LIRP has a number of surprising benefits.
No Contribution Limits
No Income Limits
No Legislative Risk
A Balanced Approach to Tax-Free Investing
Life Insurance as Long-Term Care: Doing Double Duty
The Economics of an ATM Machine
1. McKnight, David. The Power of Zero: How to Get to the 0% Tax Bracket and Transform Your Retirement (p. 53).
2. Remember, only the IUL can offer all of the following qualities:
Safe and Productive Growth
Low Fees Tax-Free and Cost-Free Distributions
A Long-Term Care Rider
2. McKnight, David. Look Before You LIRP: Why All Life Insurance Retirement Plans Are Not Created Equal, and How to Find the Right One for You (p. 84).
If you understand the power of compounding interest and how taxes can affect you in the future you will understand why investing in a LIRP in your younger years in life will build you a large amount of wealth as compared to starting in your 40’s or beyond. That does not mean that one would not benefit from the power of a LIRP in their 40’s, 50’s and 60’s but one would get more accumulation of cash if they started earlier in life. Which would lead to the power of one’s own personal banking system.
What does this all mean and how does it affect you?
Now is the time to start the conversation with a financial professional and coach so let’s talk. Your future and your children’s future depend on it.
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