By: Onari Tariah
As advisors, we have a unique view of others’ financial journeys, especially the journeys of our clients — since we serve as their guide. Many of those we work with are on the path to accumulating substantial wealth. The on-trend word is HENRY. (High Earner Not Rich Yet) They work hard, are prudent with their finances, and in many cases, the right circumstances have lined up. They have a head start on the path to success.
With my career underfoot at a financial planning firm, I have an up close and personal view of the journey to success. Here is what I see as the most common money mistakes people in their 30s can avoid.
1. Keeping up with the Joneses
Trying to “Keep Up With the Joneses,” a term that is often mentioned in regard to people trying to keep pace with those around them, even though it means living beyond their means. It’s important to not get carried away and baited into such things. It can have a detrimental impact, not just on your finances but on your mental health as well. (Read up here on how to avoid lifestyle creep.)
One of the most common symptoms of “Keeping Up With the Joneses” is credit card debt. Credit cards can be powerful tools — earning points or rewards, establishing credit, and even providing extra bandwidth if cash flow is tight. However, they can also entrench you in a life of debt.
A common mistake for many is to make the minimum monthly payments instead of paying off the entire balance each month, thus exposing themselves to further debt due to the accumulating interest. After all, there’s a reason why it’s called revolving debt. The solution is simply to live within your means. The only thing to “keep up with” is the financial confidence you’ll build!
Here are some tools to help you:
- Budget tool : A helpful calculator to budget your needs, wants, and savings
- The 50/50 Rule : How to save while still treating yourself
The power of investing should never be underestimated, and the earlier you start the longer your money has to work for you.
Many employers offer the opportunity to save and invest through payroll deferrals into a retirement plan (e.g. 401k). These have the added benefit of saving money on a pretax basis, allowing participants to save and compound earnings on a tax-deferred basis. If your employer offers a Roth 401(k), then you can even grow your assets on a tax-free basis. See comparison of the two in this FJY 2020 blog.
At first, investing may seem like a cost, the cash is coming out of your pocket and the benefits won’t be tangible, likely for a long time. Nevertheless, you should persevere and form the habit of paying yourself first. The long term benefits will outweigh the perceived short term cost.
Remember investing is all about the long game. If you’re ready to start investing here’s a good place to start
3. College Planning For Your Kids
We all want the best for our children — who sure do grow up fast! Before you know it, it’s time to go on college tours. With the cost of higher education steadily rising, it’s imperative to start planning now.
One of the best ways to save for college is through 529 plans, which are designed specifically for college education. Contributions to a 529 plans can be tax deductible depending on your resident state but earnings in the plan accumulate on a tax-free basis and withdrawals are not subject to tax as long as the funds are used to pay for school.
Setting your child up to start their career free of debt is an incredible gift but, finding a balance between what’s important now and what’s important later can be difficult. College is more important than always having the latest toy or gadget but, keeping fun, surprises, and laughter in your family’s life is essential as well. Whatever balance you strike for your savings goals, your support and guidance will be invaluable to your child as they continue to grow into their own person.
4. Spending Patterns of You and Your Significant Other
Communication around your combined finances can be crucial to the success of your relationship and your financial plan. It’s probable that if you haven’t had this discussion then you and your significant other are not on the same page. Effectively communicating where you are and where you want to get to together will help you create a plan that brings you both the success you’re dreaming of.
Have you taken the time and resources to protect what you cannot afford to lose? Much of our planning revolves around what we want to happen, but we cannot forget the certainty of uncertainty. Life will throw us curveballs and as our wealth accumulates, we need to ensure we have protected what is important to us:
- Life Insurance
- Disability Income Insurance
- Property and Casualty including umbrella coverage
- Estate planning
Each of these is unique to each family’s resources, current situation, and future goals. Peruse our library for more information on each category.