Your thirties are where most people start to make some big financial commitments, in particular a house and/or a family. This can have a massive impact on the money coming in versus money going out – but all too often people don’t take their finances as seriously as they should and still have a “she’ll be right” attitude that can lead to disaster.
Risk Number One: Risk of the “Quadruple Whammy”
First, upgrade to a larger family car. Second, upgrade to a larger family house. Third, then drop an income for maternity leave. Finally start paying for child care and education.
This, by far and away, is the most common financial disaster that I see people not foreseeing well enough. Although I have simplified the issues and goals here for illustration, I have seen a story like this literally hundreds of times in the last 10 years.
A young couple comes in for a review of their financial situation. They have both been in the work force for 10 years, and both seen their pay rise significantly in that time. They have recently joined forces financially and are finding saving money really easy:
|Bills and Living expenses||-$50,000|
They have been putting this money away for a few years and saved $60,000. Seems like everything is going great. Good income, saving money and a larger than average deposit for their first house. They enjoy travel and want to maintain their holiday budget along with their current standard of living.
This is what they want to achieve over the next 20 years:
|Buy a family home big enough to accommodate a family of 4.||$600,000|
|Wedding and Honeymoon||$20,000 (remainder coming from gifts)|
|Buy a larger car in preparation for a family||$30,000|
|Start a family and take 6 months maternity leave||Using the Federal Government’s Paid Parental Leave and then unpaid leave|
|Fund child care||$70 per child per day|
|Have second child and take 6 months maternity leave||Using the Federal Government’s Paid Parental Leave and then unpaid leave|
|Pay for a local private school from grade one to twelve||Cost of $5,000 per child per year|
They have spoken to the bank, who of course told them that they could “afford” to borrow up to $1,000,000 and that the repayments on a $600,000 house are only $117 a week more than their current rent repayments.
At this point I normally help them do some projections that look like this.
|Now||With House and Car (at current interest rates)||On Maternity Leave (for 6 months)||With 2 kids at child care||With 2 kids at school||With more normal interest rates|
|Rent/Home Loan repayments||-$26,000||-$32,000||-$16,000||-$32,000||-$32,000||-$44,700|
|Bills and Living expenses||-$50,000||-$54,500||-$27,250||-$54,500||-$54,500||-$54,500|
Note: this is simplistic forecasting that does not take into account inflationary pay rises or increases in expenses over time.
As you can see there are long periods of time that this couple are going to be spending more than they are earning. They have many options to fix these issues and it ends up being all about their priorities. People who come in to see me further down the track, when they are already going backwards, have many less options available to fix the issue. For example, here are some things the couple could do now to help the issue that they cannot do in 10 years:
- Save a larger deposit before buying a house
- Buy a less expensive house
- Cut back on travel and lifestyle just a little bit now (rather than a lot later)
- Reduce goals around maternity leave and/or around the car purchase
- Live close to family that can help with child care
- Get the right fundamental habits around saving money in a disciplined way
However, quite often people don’t seek help until the problem is metaphorically slapping them in the face. They come to speak to me having not identified this risk with a credit card debt of tens of thousands of dollars with very few options available to them.
Don’t ignore this risk!
Risk Number Two: Taking on too Much Debt
Linked to the quadruple whammy is the risk of taking on too much debt. For a long time, interest rates have generally been dropping and property prices have been rising quickly which means it has been relatively hard (but still surprisingly common) to over borrow for your home and for investment.
Dropping interest rates means over time high levels of debt become cheaper and if people did get into trouble they could just sell their property (unless it is in Mackay or Gladstone where some properties are worth 50% less than what they once were).
That being said, interest rates can’t drop another 15% in the next 30 years, and eventually property growth will probably revert to normal.
It is not a recipe for happiness to have high levels of debt at the expense of being able to:
- Pursue your passions and hobbies
- Spend time with your family and friends
- Help others including your children
You need to do your own math (at higher interest rates) on what level of debt you can afford, and don’t assume what the bank offers you is a responsible figure.
Risk Number Three: Injury or Illness
Insurance is expensive, and in your 30’s the risks of the major killers are still low – however there are still plenty of things that could:
- Stop you from being able to work
- Make you “high risk” or uninsurable for the insurance companies down the track
Mental health problems, skin cancer, multiple sclerosis, chronic back issues, and transportation accidents can all be life changing events. If you have enough wealth or cash flow inside or outside of superannuation in order to pay for this insurance and still achieve your other goals, then perhaps you would prefer to make sure that if something did happen, you are not going to live on the disability support pension ($23,088 p.a.) for the next 50 years.
Making sound financial decisions in your 30’s will have a massive positive impact on your financial future. If you would like to discuss what decision you have coming up and get professional guidance over what you should be focused on then please do not hesitate to contact me on 1300 472 000 or firstname.lastname@example.org.
Disclaimer: This is not an exhaustive list of all risks and your specific circumstance might have other, more important, risks specific to you.