Three Essential Financial Planning Questions for Thirty-Somethings
By age thirty, personal financial planning becomes, in many cases, necessary for long-term success.
By age thirty, personal financial planning becomes, in many cases, necessary for long-term success. During their twenties, people are finding their way personally and professionally. Long nights at the office as “low man on the totem pole” can turn into a mid or senior level position and a well-established career track by the age of thirty.
Likewise, the twenties lifestyle of living with friends and going out on weekends gives way to marriages, families, and moving to the suburbs. By age thirty or thirty-five, especially when children enter the picture, there is less discretionary time and money, so every dollar needs to count.
For individuals approaching thirty and beyond, here is a quick litmus test to see whether you have a handle on your financial situation. If you can’t affirmatively answer these questions, your financial plan may need attention.
- How Much Do You Save Each Month?
Everyone knows what hits their bank account each pay period. Some people know their monthly spending number. Very few people know their monthly savings, or deficit, number. This number could include retirement account contributions from payroll, but in general, people should have a good idea of the portion of their monthly income that goes towards achieving their long-term financial goals.
It’s been said that every dollar should have a job. Some should go to bills, some to fun and lifestyle, and the rest to savings. I cannot overemphasize this mantra.
The basic principle of a successful financial plan begins with cash flow. Almost any long-term financial goal is reachable so long as there is healthy cash flow, because this is the lifeblood of savings, and ultimately the compounding returns that savings can generate (the holy grail of personal wealth and financial freedom).
While most twenty-somethings are trying to cover their bills and may be under a slug of student debt, thirty-somethings often have significant savings opportunities.
As many thirty-somethings achieve higher earnings, they experience what’s known as “lifestyle creep”. They move to better apartments, buy nicer clothes and cars, eat at expensive restaurants, and travel to expensive locations. This is all fine. People work very hard to do these things, but it’s important to examine spending patterns and adjust, if necessary.
A simple budget is the 50/20/30 budget where 50% of income goes to expenses, 20% to savings, and 30% to discretionary expenses. This is by no means a one-stop solution, but rather just an example of a simple budgeting system.
- What’s Your Net Worth?
Everyone knows their prior year W-2 income. Some people tally up their assets. Very few people know their total or liquid net worth—perhaps the most important diagnostic for long-term financial planning.
When people speak of their financial health, they often think in terms of income. To make a health analogy, income is sort of like strength—it’s one very important part of overall health. Some people believe the higher the income, the wealthier the person. But this is like saying the more someone can bench press, the healthier they are. It’s a surprisingly non-correlated measure.
We all know a few guys at the gym that can bench 400+ pounds but probably can’t touch their knees or run a mile. Just as we can’t determine someone’s health levels based solely on strength, we can’t determine someone’s wealth based solely on income.
Once someone earns enough to fund their basic lifestyle, savings become much more important than earnings. We’ve all heard the stories of two employees that work alongside each other for twenty or thirty years. At age 65 one can retire, the other cannot. Clearly, income is not the deciding factor.
It’s all about net worth. To determine net worth, simply total assets and liabilities, and then take the difference. If you are in your thirties and have a negative net worth due to things like credit card debt or student loans, eliminating debt should be the biggest priority. If net worth is low or flat, saving and investing should become a priority.
Either way, the goal is to manage cash flow so that either assets increase or liabilities decrease and get the net worth metric moving toward the right direction.
- What is Your Current Asset Allocation?
Most people know if their 401(k) went up or down last year. Some people know which individual investments are held in their 401(k). Very few people position all of their investable assets along a diversified asset allocation that best suits their risk profile and long term goals.
The third question addresses investment growth and knowing that the assets currently earmarked for long-term investment are properly positioned.
In the subset of all your assets are liquid assets—really everything outside of real estate, care, clothes and other items that wouldn’t provide immediate liquidity.
Within liquid assets, there is another subset of investable assets, which should include everything outside a rainy day fund of cash in a checking or savings account.
For most people, investable assets are 401(k)s, IRAs and sometimes a brokerage account. In my experience, many people let their checking and savings accounts balloon into a sizeable portion of their liquid net worth, as opposed to using those funds to invest or pay down debt.
The important point is that people rarely take inventory of all their investable assets to check whether they have the proper exposure to stocks, bonds, and cash. This mix of investments, known as asset allocation, is the key driver of long-term investing success and achieving compound returns. The longer someone goes without proactively monitoring this, the greater chance there is of making an investment mistake. Having an overly aggressive portfolio of all stocks could lead to unintended volatility. Having too much cash could result in years of missed growth opportunities.
For Those Entering Their Thirties, It’s Time to Take a Look at This
Without going deeper into the reasoning or planning behind any of these areas, or suggesting solutions for any number of issues - the first step is considering the questions.
Schedule a free consultation with a Claro Advisor now to get your finances in order.