Managing Personal Finance in your 30s

For those in your thirties, this is an important stage of your life. Gone are the carefree days of the twenties. Most likely, now you have a family and your responsibilities are increasing. With increasing responsibilities, your expenses are increasing, but your income is also rising. From a personal finance perspective, the thirties is the most important stage of life in building the foundation of financial success. In an article few weeks back, we had discussed some key personal management for the twenties. In case you had made progress against some of them in your twenties, you have got a head start. However, if you have not been able to, for any reason, there is no cause to despair. With a robust financial plan and a disciplined approach, you will be able achieve your long term financial objectives. Here are 10 key principles that you should set in concrete for your 30s.

1. Pay off non home-loan related debt:

   You should have paid off all your non mortgage debt, in your twenties. If you have been unable to, you should have a structured plan to be debt free. The thirties bring increased responsibilities, such as raising a family and investing for the future. The best way to meet these obligations is to free up cash flow, by getting rid of your non mortgage debt. In case you have credit card loan or non-collateral personal bank loan, that should be paid off with priority, since the interest rate for these types of loans are the highest. Next you should focus on your student loan. Auto mobile loans should come next



2. Eliminate debt structurally:

   Paying off your car loan, only to take another loan for a bigger car, will do you no good, purely from a financial viewpoint. By no means, I am suggesting that you should not aspire for bigger and better things. However, you should evaluate decisions like these, holistically along with your other financial objectives. Having a structured financial plan, will help you evaluate these decisions effectively. One way to save for big ticket purchases is to put the money that you would have spent on your EMIs, into a suitable systematic investment plan, after consultation with your financial advisor. The discipline of systematic investments will not only yield benefits of compounding, but will also help you eliminate debt structurally



3. Invest in real estate:

   Buying a house is both a financial and emotional aspiration for us Indians. It is a great investment as well. Over the last 10 – 15 years in India, real estate as an asset class has given superior returns relative to a lot of other asset classes. One should try to invest in real estate as early as possible, for a number of reasons. (1) If you invest early, as you progress in your career and your disposable income grows, you will be able to prepay a greater portion of your home loan principal balance and thereby reduce your interest expense over the term of the loan. (2) Also you will be debt free earlier in life. (3) You will get the benefit of capital appreciation, since capital appreciation in real estate is usually a function of time. (4) You will be able to save on taxes, both under Section 80C for principal repayment and under Section 24 for interest payment, for self occupied property. Since a house purchase usually calls for a big financial commitment, both the total purchase consideration and property selection, require careful evaluation. Particularly, with respect to a home loan, you must ensure that you do not overstretch yourself. Remember the last financial crisis in the US, was caused by over-leveraged mortgages. On the other hand, being ultra conservative and under-leveraged is also not a good idea, since you may end up compromising on the aspirations of your family and also limit the scope of your capital appreciation. While there is no exact formula for leverage, EMI to net salary (post tax and other mandatory deductions) is a useful ratio to look at. While the ideal ratio depends upon individual situations, a ratio of 30 – 35% seems to be suitable for an average Indian household. With regards to property selection there are many factors, the track record of the developer being the most important one. A comprehensive discussion on the considerations of real estate investment is beyond the scope of this article (we will devote another article to that topic), but in summary real estate investment should be a key milestone as part of financial planning in your thirties.



4. Retirement Planning:

   Your thirties is the time when you should seriously start thinking about retirement. Retirement is an inevitable fact of life, whether we choose to ignore it in our thirties or not. Retired lives are now longer than our previous generations. Financial considerations arising out of maintaining our lifestyle after retirement and ever increasing medical expenses make retirement planning a very complex topic. You need to get serious about retirement planning in your thirties, so that you can have a comfortable retirement without sacrificing a lot in your current lifestyle. Waiting until your forties or fifties to plan for retirement, can seriously compromise your retirement goals. A systematic investment plan is a great approach to retirement planning. We will discuss more about retirement planning in subsequent articles, but retirement planning should be an important goal at a fairly early stage of your career. You should not trade off retirement planning with your other goals. For example, do not be tempted to save for your child’s higher education, instead of saving for your retirement. After all, your child can get educational loans to pay for his or her higher education, but you will not get a loan for your retirement. So make sure that your own retirement plans are on track first, before you focus on other long term objectives.



5. Have a balanced investment portfolio:

   One of the most important concepts of personal finance is that, our risk profile is not constant. At any stage of life, your portfolio of investments should be diversified as per the risk profile, consistent with that stage of life. Your financial planner should be able to provide appropriate guidance with regards to your portfolio composition, in line with your risk profile. Your portfolio should be balanced between fixed income (debt) and equities, and within equities between large cap and mid cap companies. A balanced portfolio protects you from the vagaries of market conditions prevailing over a specified time period



6. Invest in yourself:

   At the end of the day the best investment that you can make, is in yourself. You should not stop investing in yourself, once you get a decently paying job and career progression. You should continue to grow your earning power, through continuous education, training and personal development. The easiest way to save more is to earn more and therefore, one must always be focused on investing in oneself. Investing in oneself, is the best way to invest for the future



7. Get sufficient Life Insurance:

   If you have children or anyone else who depend on you, life insurance is the most important vehicle in ensuring any kind of financial security for them. While in your thirties and in good health, you can get a good deal on term life insurance, without paying a hefty premium. If you have already taken a life insurance policy in your twenties, evaluate if it is sufficient to meet the needs of your dependent, and adjust accordingly. There are several factors involved in choosing a life insurance policy that is most suited to your needs. You should consult your financial advisor



8. Live a simple life:

   Delayed gratification is certainly not fun, but adopting a simple lifestyle is a sure way to meet our current financial needs, while meeting your long term financial objectives. You should continuously evaluate and identify areas where you can reduce expenses, since small sacrifices can add up to big rewards as far as personal finance objectives are concerned. One of our worst enemies can be our competitive streak. It is easy to get jealous of our friends and family, who are may have a better perceived lifestyle as compared to us. We should always remember that keeping up with someone else, is often a losing proposition. You must consciously deal with financial peer pressure, and focus with laser like precision on the state of your own personal finances and your financial objectives



9. Safeguard your assets:

   Unexpected financial events often serve as a purpose of derailment of the best financial plans. From a thirty something home owner perspective, it means having a loss of income insurance, health insurance and disability insurance. It also means, having enough emergency funds, to cover for all such exigencies. You should have started stocking your emergency fund in your twenties, but in your thirties you should have enough to cover for 6 to 9 months of expenses, in the event of a job loss, medical emergency or any such other financial surprises that may have an adverse impact on your personal finance situation



10. Donate to charity:

    As you become more established in your life, in terms of your career goals and your personal financial objectives, you should take the opportunity to give something back to the society. After all, we are a product of our societies, and we should give something back, so that the whole community progresses. Being charitable can be especially rewarding and financially "smart", considering tax benefits for charitable contributions. In your thirties even if you are unable to make a cash contribution to a charitable cause, you can volunteer your time or talent in a cause that you believe in. Often contribution of your time and effort is more valuable to such organizations, as opposed to monetary contribution. Once you immerse yourself in a charitable cause for your community, you will discover that it does not cost a lot to make a substantial difference to your society.