QUESTION: I am a member of the “millennial” generation and I once read somewhere that there are some financial preparations that I must do before hitting 30. Can you advise me? – Cherry F., via Facebook Messenger
Answer: There’s something about hitting 30.
Somehow, you are still considered young at 30 and yet not that young anymore. Many things happen when you cross the 30 mark in the many aspects of your life. Your career should be taking off at this age, you may have started a family or contemplating on starting one, you may have started accumulating wealth and you may have also started accumulating debt.
If ever I get to do things over again, here are the finance concepts I will definitely be serious about before hitting 30.
1) Ensure you have a healthy cash flow—Folks in their 20s have started to earn and appreciate enjoying their income. The problem is, they enjoy their income too much that there is a tendency to spend every peso of it. Accumulation of stuff begins at this stage and lifestyle upgrades become a social pressure.
Way before hitting 30, make sure you have a good grip on money management. Working on a written budget is the best place to start. Learn how to allocate your income between needs and wants and make sure that at the end of the month, there is savings left. For those in their 20s, it’s best to have 30 percent to 40 percent savings left from income. This is very possible if you have the discipline to stick to a budget. The money behavior you will develop during this period will have a lasting impact on your financial future, so better start doing things right.
2) Minimize borrowing—Credit card companies and financial institutions always target this age group because they understand that people in their 20s love to accumulate stuff, see the world and enjoy life in general—the perfect setting to lure people into debt! Not all debt is bad but you need to learn how to discern a good debt from a bad one. Generally speaking, a good debt is one that will allow you to grow your assets and/or add income like a loan to finance a business or to purchase a real estate property. Any other debt that will not grow your asset base or add on to your income would be considered a bad debt like using your credit card to finance your new Samsung or iPhone smart phone, a Michael Kors bag, or your dream vacation to Bali.
People in their 20s begin to accumulate credit debt and other consumer loans, which are grossly disproportional to their incomes. The bad credit decisions you will make during your 20s will have severe ramifications up to your 40s and 50s. Your credit standing will also be made or broken during this time, so learn how to use credit responsibly.
3) Start investing—The best time to begin investing is when you are young! When you have a lot of time, you can have more options on how to grow your wealth and even take in more risks. Taking in more risks will mean that there is a better chance of growing your wealth faster and you can ride the ups and downs of the economic cycles. If you lose money and you are young, you still have a lot of time to recover.
Start learning how to invest and act on it. A good way to start is to put some money in a mutual fund or the UITF of your bank. Make your investing automatic by regularly adding to your funds or buying more shares. In your 20s, you probably don’t have sizeable investment funds yet but small amounts done regularly will also produce great results. If you started investing only P2,000 every month at the age of 21, you would have accumulated over P1 million by the time you hit 41 (assuming a yield of 8 percent a year). Have an auto-debit arrangement for investments. Remember, invest early, invest wisely and invest regularly.
4) Buy life insurance—This is not a pitch for life insurance agents but I encourage you to listen to one. If there are people already depending on your income, do not delay buying a life insurance policy. Premiums are much cheaper if you buy insurance before you hit 30. There are many kinds of life insurance policies but I suggest that you buy term and also invest in mutual funds or a VUL which is a term with a mutual fund. Just make sure you choose a reputable provider with a good record track record.
5) Learn from your mistakes and the mistakes of others—For sure, you will make a lot of mistakes in your 20s—and your 30s, 40s, 50s, 60s and 70s. Along with many other mistakes you are bound to make, some of them are financial mistakes—bad investment decisions, wrong borrowings, wrong purchases, etc. But that’s life and the best way to respond to our mistakes is to learn from them and not repeat them. As you make those mistakes, always look for the lesson behind those mistakes and learn to avoid them in the future.
Experience is your best teacher but we don’t always have to learn from our own experience. You can also learn from other people’s mistakes. Hitting 30 is a big thing and somehow, it’s a passage rite for many of us. It is a time to learn from the past and also a time to be hopeful about the future.
(Randell Tiongson is a Registered Financial Planner of RFP Philippines. To learn more about financial planning, attend the 48th batch of Registered Financial Planner (RFP) Program on July 11 – Aug 29, 2015. For more details, inquire at info@rfp.ph or text <name><email><RFP> at 0917-3464126.)