It’s probably no coincidence that the iconic rock song “Under Pressure” was recorded when all members of the band Queen were still in their 30s. Because financially speaking, that’s precisely what this decade feels like when you suddenly find yourself juggling the responsibilities of buying a home, starting a family and somehow trying to save for retirement. Your 30s are overwhelming and without careful planning it can be all too easy to fritter away paycheques haphazardly—and find yourself stressed out and not gaining any momentum. “You need to prioritize what is important to you, and you need to clearly identify short-, medium- and long-term goals,” says Calgary money coach Tom Feigs. Doing that will help you figure out what you need to focus on now and what can wait. Remember, it’s all about striking the right balance.
Create a financial plan
Whereas in your 20s you could count yourself among the financially erudite if you were simply living within your means and not racking up consumer debt, that’s not going to cut it anymore. It’s now time to get serious about creating a financial plan to ensure that you’re not only setting goals but also using your income as effectively as possible to meet them.
Remember too that your paycheque will only spread so far in your 30s—so be realistic about what you can achieve. Likely, your primary concerns are going to be paying for a wedding and a down payment on a house. Following that you may have to adjust your spending for the additional expenses of mortgage payments—and possibly kids. One parent could be on maternity or paternity leave, meaning you’ll have even less income coming in. “Your goal should be to get out of your 30s with a house, an intact marriage and with maybe a little going to your kids’ educations and your future savings,” says Karin Mizgala, co-founder and CEO of Money Coaches Canada.
Embrace good debt
For most people, a home will be the biggest purchase of their lives and seeing that first mortgage statement is often enough to give even the most steely-nerved person a few heart palpitations. But never forget that any asset that appreciates over time is good debt, and when managed properly will help you build up your net worth. So consider your house a forced savings plan that will help you build up equity, provided you stick to a payment schedule you can truly afford.
Bad debt, on the other hand, means borrowing money to buy a car you can’t actually afford or racking up high-interest credit card bills to purchase expensive items you really don’t need. If you find yourself with a lot of bad debt, make it a priority to pay it off as quickly as possible—and forget saving for anything else until it’s squashed.
Keep the mortgage in perspective
While paying down your mortgage quickly is never a bad strategy, it shouldn’t come at the expense of retirement savings altogether, says Dan Hallett, director of asset management for HighView Financial Group. “There should be a balance, but it’s all going to boil down to your personality.” Provided you’re making minimum mortgage payments and you don’t have an amortization that takes you into retirement, not putting some of your extra cash flow into RRSP or TFSA investments can be considered risky—because you don’t know which will have the bigger impact down the road. Keep in mind, says Hallett, “that prioritizing a mortgage for 10 years is a great feeling, but you’ll have also missed out on a decade of compounding.”
All of this isn’t to say, however, that you should drag out mortgage payments for as long as you can—even if rates are very low right now. Inevitably, they will increase in the future, meaning when you renew you could see your monthly payments jump up. Plus, “there’s still going to be an effective rate of return by reducing that mortgage,” Hallett says. Simple but effective ways to whittle down your mortgage more quickly are to opt for biweekly payments instead of monthly, or to use “found money,” like a small inheritance or work bonus, and put it directly toward the principal.
Take advantage of free money
Make the most of programs that offer savings incentives. For instance, parents setting aside money for a child’s education should never overlook the Registered Education Savings Plan (RESP). The first $36,000 you contribute is eligible for the 20% Canada Education Savings Grant, which works out to a free top-up of up to $7,200 per child. Just keep in mind the maximum contribution eligible for the grant is $2,500 per year, up to and including the year your child turns 17. But that still works out to a grant of $500 annually. “Even if you’re not sure what to invest your RESP contributions in, and you put it in a high-interest savings account, you’re still getting that instant 20% return,” says Hallett. “There’s no downside.”
Don’t overlook other opportunities for free money in the workplace. When available, signing up for a company pension plan is a no-brainer. But also be sure to find out if there are any RRSP plans that offer discounted management fees or, better yet, matching contributions from your employer. Discounted employee stock purchase plans should be looked into as well.
Plan For Emergencies
Having three to six months of easily accessible funds set aside in an emergency fund is a nice thing to have, but it’s also quite acceptable to have a line of credit that’s only used in the event of something like a job loss, says financial advisor Cynthia Kett. “It really depends on the person. But I’d suggest a line of credit provided you don’t tap into it for other reasons like a vacation. That frees up your cash flow to be used more effectively to pay off your home or to invest in your retirement savings or your kid’s education.”
Hopefully, though, if you’re hitting the tail-end of your 30s, you’re starting to feel more relaxed with your money. The kids might be out of daycare, which frees up cash, and your improving career prospects are starting to pay off too. With your 40s just on the horizon, you’re now in a great position to stop worrying about the mortgage so much and start focusing on building up your nest egg.
When people talk marriage they love to focus on wedding cakes and the bride’s dress—almost anything but the threat of divorce. But failing to do so could cost you tens of thousands of dollars. “The most important thing in marriage is communication,” says Tatiana Terekhova, a certified divorce financial analyst in Oakville, Ont. “Being able to talk things through can save you the cost of a lawyer because the two of you will be able to reach an amicable agreement on your own.” To protect yourself from the financial losses a divorce can inflict, Terekhova also recommends you take a quick snapshot of your net worth before you walk down the aisle. If you own a home before marriage, get an appraisal. File away bank statements listing your own personal assets at this time as well.
“If you divorce in 15 years say, it will take months and thousands of dollars to reconstruct these numbers,” says Terekhova. “Keep these files in a bank safety deposit box or at your parents’ home—just in case.” If you do find yourself facing divorce, make sure you are fully aware of joint obligations such as lines of credit. “If you have a secondary user on your credit card, like many spouses do, that person often doesn’t have any responsibility for the debt,” says Terekhova. “Each partner should have their own credit card that they’re fully responsible for paying.”
Lessons I Learned In My 30s
Christa Alexander can only laugh when she thinks about how she used to treat her bank account. “At one time in my life, I spent money left, right and centre,” admits the Ottawa-based portfolio manager. Even occasional attempts at putting aside savings backfired. “I cashed out my RRSP in my 20s so that I could take a trip to New Zealand. It was around $5,000. I’ll never get that contribution room back and I took a huge hit in taxes too.”
These days, however, Alexander has a much different financial outlook. “You’ve got to pay yourself first. That’s probably the most important lesson I really embraced in my 30s.” She now automatically deposits a portion of every paycheque into her investments. “I don’t see it. It just goes away and I don’t spend it. But when I look at my savings account now, I like seeing how my money is growing.” She also takes advantage of opportunities for “free money” in the form of workplace benefits, and is signed up in her company’s pension plan.
Getting married and having a baby helped push her in the right direction when it comes to her finances, Alexander admits. “I had to become more responsible with my money. There’s actually less of it to go around now so I’ve got to make the most of my opportunities. I just wish I had learned to do all of this much sooner.”