Sunday, 9 June 2019
If you're like many people, your 30s and 40s are when you make the transition from surviving financially to thriving.
And while it's common to forego important financial planning when living paycheck-to-paycheck, reaching the point of financial stabilization is a good time to sit down and create a plan for moving forward.
Ideally, you've found your place in the professional world and are earning a reliable income. You probably have a credit card, a car payment, and possibly a mortgage payment. If you had student loans, you've made a dent in them or possibly eliminated them altogether. And, hopefully, you've started saving.
According to Gallup, Millennials are waiting longer than any other generation to marry, and their child-rearing years could possibly overlap with caring for aging parents, creating financial strain.
With this in mind, finding a balance between debt, saving, earning, and investing will be essential to ensuring a long, healthy financial life.
BBVA Financial Planner and Global Wealth Vice President Jennifer Williams says it helps to sit down with a financial planner. These professionals can help you clearly define your goals, and understand what you'll need to save, spend, and earn to reach them. She adds that spending and saving plans aren't one-size-fits-all, and it's important to create one that fits you, your goals, and your lifestyle.
The vast majority of people will acquire some debt during their lifetime. But what kind of debt you have can have a dramatic impact on your long-term financial success.
The term “good debt" usually refers to an investment in something you expect will grow in value, such as a home or business, or that will pay off down the line, like a master's degree. Conversely, "bad debt" is money you owe which has no possibility of becoming an asset, such as credit card debt. This debt is often some of the most expensive as well, with high interest rates that be very costly and make the debt difficult to pay off.
Williams says this stage of your life is the time to evaluate your debt and see where you can make changes. Would it make sense to refinance your mortgage? Can you find a lower-rate credit card and transfer a balance? Does it make more sense to lease a car or buy used? Consider all the steps you can take to control, reduce, or eliminate debt.
You've probably heard it a million times, and that's because it's important: you need an emergency savings fund. If you don't have one, Williams says, make it a priority to save enough to cover six to 12 months of expenses.
Think a credit card can replace having an emergency fund? Let's say you use your credit card to pay a $500 emergency vet bill and then get laid off or lose your job. You could be facing a long stretch of time during which you have trouble making your monthly payments and your debt, fees, and interest will be piling up. What's more, it's difficult to get more credit if you're unemployed.
Bottom line is an emergency fund is essential. If you're an entrepreneur or work in a seasonal industry, you may need to set aside more than a year's worth of salary to cover the lean times.
After establishing your cushion, there may be other competing savings goals, such as retirement or your child's education. Williams says to carefully prioritize where the dollars land.
“There are student loans, but there aren't loans for retirement," she said, noting that there are plenty of creative solutions for paying for college. Again, she added, it's all about balance, and a professional financial planner can help.
The 30s and 40s are peak earning years. Data from Payscale.com shows pay for men with college degrees peaks at age 48 at an average of $95,000. For women, 39 years old is the average peak earning age with a salary of approximately $60,000. Of course, this can vary widely depending on your job, where you live, and individual circumstances.
However, this period of your career is the time to negotiate a pay increase or switch to a higher-paying job if you are currently underpaid.
“Know your worth. Know what your industry pays, and make sure you're getting paid appropriately," Williams said. “If you have bigger goals, do something on the side that you enjoy and will bring in extra money.
"There are multiple sites to help you earn extra money from ride-sharing, home-sharing, and odd jobs, and also new platforms that offer more creative ways to make money (renting out your camping gear or selling your wedding dress.)
Earning more, whether it be through an increase in pay or other sources of income, can help you pay off debt and boost your savings.
Many people don't think of insurance as an important part of financial planning. However, Williams stresses the importance of being properly insured.
Are you in an earthquake or flood zone? Have you amassed art, jewelry, or other valuable items? If you have a family, do you have sufficient life insurance coverage? Even one unanticipated event — such as a flood — can wipe out years of saving and building equity. Having the proper insurance coverage is essential for protecting your financial well being.
And then there's retirement. If the last time you thought about your 401(k) was when you checked a box after you started your job, it's time to start keeping a closer eye on your all-important retirement savings.
“Look at your investments and your allocation. Are you in the right investments based on your risk tolerance? If you're super conservative, you shouldn't have 80 percent of your 401(k) in equities. Analyze and review your investments to make sure they're still in alignment with what your goals are," Williams said.
It's also a good time to make sure all your legal documents are in order. “Make sure you have all the estate planning documents in place, so you know what's going to happen and who's going to take care of you," Williams said.
One of the most important moves anyone can make to ensure long-term financial success is to hire a professional advisor. Williams says an important place to start the conversation is at the end.
"What do you want it all to look like when you're older? If I want this, how much am I going to have to save? What is my rate of return? What type of allocation do I need? and, Can I stomach that?"
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