When one moves from his/her 20’s to 30’s, there are a lot of changes which takes place. You may just be married or just adjusting to a new job. It is important carry out a few critical financial steps before you turn 30. Here are the top five financial tasks to be carried out:
A Penny Saved is a Penny Earned:
When you in your late 20’s, the one main advantage you have on your side is that you have time. Many people do not realise this advantage and make minimal investments while spending the rest. Let’s take for example, two individuals Gary and Sam who both earn $5,000 salary each month. Gary saves around 10% of this each month after his monthly expenses on essentials and entertainment. Sam on the other hand invests 20% of his salary immediately upon the monthly salary credit and spends the rest. Assuming both invest in mutual funds for period of 120 months. Gary invests $500 per month and Sam invests $1,000 per month, at the end of the investment period, Gary has accumulated $103,276 while in the case of Sam, it is $206,552, taking a return of 10% per annum. A small difference in monthly investment initially results in a huge difference in the end corpus. During your younger days, you have lesser expenses and if you inculcate this saving for future mindset, it will help a great deal in your Rainy Days. Thus, your first step when you think of financial steps to be taken is to increase your monthly investments truly living up to the wise advice of“Save First & then Spend”
An emergency fund is an important step to be taken and should be present at all times in your life. Before turning 30, you should necessarily have a contingency fund or emergency fund in place. This is because life is uncertain and anything can happen which can disrupt your financial stability. For example, a job loss or an accident which can put you out of income for a few months. An emergency fund should ideally cover 6 months of your expenses. Fixed payments like Equated Monthly Instalments of loans should be included in expenses for the purpose of calculation of emergency fund.
Estimate goals and plan investments:
This is the time when you should start thinking about your goals in life and make investments accordingly. Important life goals for most individuals include children’s education and marriage. Purchasing a car or a house can also be goals for you.
Assume you have a child and expect her to go for higher studies and get married in 18 years and 24 years respectively. If you estimate the cost of these two goals in today’s price levels to be $30,000 and $25,000 respectively and an annual inflation of 7%, then you will need to have a corpus of $101,398 for education and $126,809 for the marriage goal at the end of 18 years and 24 years respectively. When you know your target corpus, you should work backwards and estimate how much you need to save on a monthly basis to get there at the end of the time period. Get the help of a financial planner if this seems to be very complicated. You should also decide which investment you wish to save for this goal, and as far as possible try not to withdraw from this investment.
Take a life and health cover:
People who are about to reach 30 rarely give insurance a thought. This is because it is generally assumed that one will not die so soon, and health problems also will not arise for a perfectly healthy person. However, with increasing risk of lifestyle diseases, anything can happen to anyone anytime. Hence it is absolutely necessary that you take a life cover even before you are thirty. Taking a life cover at an early age can also help in getting this at a lower premium. Understand your goals, liabilities and dependents before you decide on the amount of cover needed. Further, rising medical expenses make it necessary for every person to have a health cover as well. Take a family floater health insurance policy which covers your entire family. If your parents are dependent on you, then your health insurance policy should ideally cover them as well.
Plan for retirement:
Retirement seems very far away when you are entering your 30’s. However, a prudent person plans for retirement from the time he starts earning. So, estimate what you need as a retirement corpus based on your monthly living expenses. Estimate the retirement gap by understanding what you already have as investments. For example, your employee provident fund balance or pension fund balance can be accounted towards retirement. Once the retirement corpus is estimated, you should deduct the investments you already have, and plan for the remaining amount.
As mentioned earlier, when you enter your 30’s, the greatest benefit you have is that you have time on your side. Planning properly and executing the plan methodically can help in attaining financial stability throughout your life stages.
This Financial Prudence at a young age will be your biggest advantage.
“Art is not in making money, but in keeping it!”