Your 30s are the decade to take hard-hitting decisions that impact the rest of your life
The 30s are that strange time between being a brand-new adult (didn’t you just graduate college?) and suddenly turning into a middle-aged person. Where did an entire decade disappear to?
Well, it’s a chaotic world out there. I can’t help you with the vanishing time, but at least I can put together a financial checklist in order of priority to help sort out the anxiety-inducing thoughts of checking accounts and retirement targets.
Just a quick segue; if you have missed the first part of this checklist (for the 30s), you can read here.
So, without further ado, here is the Ultimate Personal Finance Checklist, with a single instruction — begin at the beginning and go from there.
1. Evaluate the surplus in your budget
This is a great time to get a handle on exactly how much is ‘surplus’ in your budget. You may have had your household income rise by leaps and bounds, as well as your expenses. Hopefully, the growth in income has managed to keep up (worst case) or outpace the growth of expenses (best case).
You may have existing investments flowing out of your paycheck, for example, towards an employer-matched retirement account. However, these would have been based on what 20-year-old you felt was adequate. Now, with your increased income, there may be more money that could be invested, but that is being left on the table — or in the checking account, just tempting you to spend it.
If you feel that you have a completely distorted view of your expenses, go back and track them (refer step 2 of the previous checklist). If that isn’t something you want to do or think that your expenses are reasonable, see how much money is left in your checking account on average at the end of the month. That is your additional surplus, begging to be utilized.
2. Bump up your emergency fund
In your 20s, you could fly with a small emergency fund of just a few months of the bare minimum necessities. That can work when you are a single or a DINK household. However, as soon as the number of dependents (aka kids, or indisposed parents) increases, the risk of any emergency seriously impacting your entire family increases exponentially. The current situation has made the importance of an emergency fund abundantly clear.
Apart from the increase in people depending on you for their basic needs, there are also expenses that get added in your 30s, that you could do without in your 20s. For example, if you lose your job now, it would be humiliating to couch-surf at your friend’s house with three kids in tow — something that is very much within the realm of possibility for a 22-year old. A 25-year old can also easily survive on cheap fast food for a bit, whereas that would be calamitous for your health and waistline now (a slowing metabolism is the worst part about turning 30, right?).
Though your emergency fund could still, in theory,range from 3–12 months, now is a good time to bump it up towards the higher end of the spectrum. One good rule of thumb is to add 3 months to your under-30 emergency fund. So, for example, if you had a 4-month fund saved up earlier, you should now aim for a 7-month fund.
You know what the good news is, though, right? You now have a use for all that surplus you found in step 1!
3. Consider disability and long term care insurance
Your 20s are the time when basic health and life insurance will suffice. Unfortunately, life does throw other spanners in the works. Your 30s are the time when you deal with these unpleasant possibilities, instead of just hoping for the best.
One of these is disability insurance. According to the Council for Disability Awareness, 1 in 4 workers who are 20 years old will be disabled before they retire. That is a sobering statistic. A disability can be devastating physically and emotionally, but equally importantly, financially. It can force you to avail of high-interest loans, deplete not just your emergency fund but also your retirement funds, or even file for bankruptcy.
There are certain things to keep in mind before purchasing disability insurance:
- Disability can be of various types — short term (including childbirth, or illness) and long term (including chronic illnesses or serious injuries).
- Some of these disability types may already be covered by existing structures like social security, workman’s compensation, group disability insurance offered by your employers, etc.
- So, you must evaluate what disabilities are covered for you, and which remain uncovered and require to be insured.
- Disability insurance will broadly replace about 50% of your current income.
- As a rule of thumb, you would require to budget around 1–3% of your total income for this insurance.
The second is long term care insurance. According to the Urban Institute and the U.S. Department of Health & Human Services, about half of 65-year-olds today will eventually develop a disability and require some long-term care services.
While health insurance covers, only short-term stays requiring skilled nursing, long-term care, and assistance with routine daily activities, like bathing or dressing, will not be covered.
There are some things to be considered before purchasing long term care insurance:
- Medicaid does cover such costs but has strict income thresholds, as well as asset thresholds. That means you will have to spend out of pocket till that time as you reach the threshold, after which Medicaid will foot the bills. Also, it will limit your choices to only those nursing homes that accept Medicaid.
- The median costs of various types of long-term care in 2018 are as under:
- The premium for long-term care insurance is variable. Ensure to check your insurance provider’s history of increasing premia.
- The average annual long-term care insurance premium is $2,727. That provides a benefit of $161 per day for nursing home care for a set number of years (four is most common).
4. Upgrade your credit card
After the macabre research of disability and long term care, now comes a fun point. While your 20s are to be used for getting good at using credit cards responsibly, your 30s can be used to maximize the plethora of benefits that credit cards can offer to the discerning user.
Granted that these fancier credit cards cost more in annual fees than your basic no-fee credit card. However, if you are smart with routing all your major expenses through your card and paying it in full every month, there is no reason to leave those sweet reward points on the table!
One way to ‘travel hack’ or ‘hotel hack’ or whatever else you want to do with your reward points, is to plan backward. Many credit cards have affiliations with certain airlines or hotel companies, so that is a permutation that you need to factor in to maximize your bang for the buck. Jacob Wade has a really fun story of how they first planned where they wanted to go, and then worked backward to go to Hawaii free with his family — of seven! Though it may take a few hours of your time, it may be worth it in terms of the value you can derive from free flights, and hotel stays.
5. Set a broad plan of how you want to spend your retirement
Your 20s are far too young for any of us to know how we want to spend our retirements doing. By the time you’ve crossed 30, though, most of us would know at least the broad parameters of what we like and what we don’t.
Some of the questions that you may consider thinking about and discussing with significant others (and kids, if they are old enough to understand) are:
- Are you someone who needs to work to feel like a productive member of society, or are you perfectly fine, not working?
- If you like working, how much do you want to work after retirement? Will that be part-time fixed employment, or would you rather consult and retain time flexibility?
- Where would you want to live? Are you open to moving to another country to maximize the use of each dollar, or would you rather work for a larger retirement nest egg and live in your own country?
- Is the house that you own right now, your dream retirement home? If not, do you want to live in a bigger or smaller house? In the city, in the suburbs, or a smaller town?
- How much do you want to travel after retirement? What sort of traveler are you — budget or luxury?
All these are not just great thought experiments to get you motivated to sock away a bit extra towards that dream retirement, but crucial factors to figure out how much you need to save. For example, factors like continuing to work after retiring, moving to a cheaper country/locality, and traveling on a budget (I am assuming everyone wants to travel at least a bit after retiring) can reduce the size of your required nest egg.
Once you have a broad idea of what your ideal life after retirement looks like, redo your retirement calculations, and compare it with what you are already saving. Bump up the retirement investment suitably.
6. Learn to set and achieve financial goals
This is one of the most crucial skills to achieve in this decade.
Your 30s will throw up many decisions, most of which require at least some amount of financial planning. It will be a stress-free journey if you learn how to:
- Convert life goals into financial goals
- Break the financial goal into achievable chunks
- Implement a plan to achieve it
For example, if you are a parent, you might want to… be a good one? Let us assume that you and your significant other (if any) have decided that you want to contribute towards your child’s college education.
This is a life goal. To achieve it, you will have to convert it into numbers. For that, you will have to decide what you are willing to cover and what remains for the child to cover. Would you be covering tuition? What about super-expensive colleges? In this example, that might mean researching what the average cost of college in your country is. Put a number to it, in today’s monetary value.
Next, we need to translate this number to how much you need to contribute today. Using the number you’ve arrived at and your child’s age, you can figure out how that number breaks down into contributions per month. Hint — if you have no idea of how to do this, just use any retirement/financial calculator online. They are available a dime a dozen and give you loads of variables that you can input.
Finally, you will have to put aside that amount every month. Our old friend, the standing instruction, will help us out again. But depending on the goal, you will also need to research where you must park this money. In this case, it would likely be some sort of a 529 plan.
There will be multiple goals that you will have to balance, but the three-step routine given above will help you break them down into manageable chunks.
Just as an indicator, I am listing down some of the common decisions that may require your consideration:
- Children’s education
- Purchasing a car
- Purchasing a house
- Building capital to invest in a business or passion project
- Putting aside money to enable one of you to step back from demanding careers
- Taking a sabbatical
- Switching to another career
- Donating to a preferred charity
- Wealth-building for the next generation
7. Consider planning your estate
If you are one of the privileged ones to have sizeable assets, you may want to get an expert involved to plan your estate in a manner that optimizes the tax outgo.
But what if you’re not? Even then, I would highly suggest getting things in order to lessen the burden when your family may already be grieving for your loss. You may not require trusts and estate plans, but you do require some things:
- Updated nominees on all your accounts — bank, mutual funds, stocks, etc. This will make it easier for your family to access the money without having to jump through hoops
- Updated beneficiaries on all insurance policies — Make sure that your beneficiaries still match with who you desire should receive the proceeds from your insurance
- A death folder — A handy folder containing any and all important information that you think your family will require to ensure that they aren’t hassled in getting something that they would be entitled to. This would usually include lists of assets and liabilities, instructions on accessing them (passwords, important phone numbers), tax information, and access to emails/socials. One nice thing that Facebook also allows is for you to set up a legacy contact. That means you can control who will look after your memorialized Facebook page, where people can post tributes, or otherwise remember you. Or you can set it to delete your Facebook page.
- A will — This will (pun intended) ensure that your assets are distributed as you intend. The effort towards a will can depend on your total assets. If you don’t have much to leave behind, many DIY ‘Last Will and Testament’ forms are available online. All you need is the signature of a couple of witnesses, a list of all your assets that you wish to distribute, and the clear identification of the beneficiary. If you have sizeable assets, you can get a lawyer involved, and then it is a simple matter of drafting and signing one.
Your 30s are the decade to take real, hard-hitting decisions, which will impact not just you and (hopefully) your old age, but also how your family can cope up with any mishaps along the way. Feel old yet?
The good news is that none of this is time-bound. Even if you’re past the 30s, these are all still things that you must get around to. The sooner, the better.
There is truly something to be said about the mental peace that comes with knowing that you are prepared for whatever life throws your way and that your family will stay protected. So, get checking and get cracking!
I have put together a handy little Personal Finance Crash Course e-book, covering everything from budgeting and investing, to retirement and goal planning. Click here to check it out, and thank you!
This article has also been published in the wonderful Post-Grad Survival Guide at this link here. Do check them out, they have many useful guides for managing money as millennials.