60. Financial Mistakes To Avoid In Your 30's
Financial Mistakes To Avoid In Your 30's
There are plenty of landmines to avoid when it comes to your money but in this episode I talk about 7 critical mistakes you'll want to be aware of in your 30's.
If you're in your 20's, 40's, 50's or older, these are all relevant for you as well! But the decade of your 30's comes with unique challenges and opportunities that I wanted to focus on specifically.
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Transcript:
Evan Neufeld: Hello and welcome back to the Canadian Money Roadmap Podcast. I'm your host, Evan Neufeld. Today we are on the last day of Financial literacy month here in Canada and so we're going to be talking about five financial mistakes you should avoid in your thirties.
Thanks so much for joining today. It's just me on the podcast for this last one of the month, but we're going to be talking today about seven financial mistakes to avoid in your thirties. Now, before I lose a bunch of my audience here if you're in your twenties or forties, fifties, sixties and beyond, these are generally financial mistakes you should be avoiding too. I just happen to be in my thirties myself, and some of these things are a little bit more relevant for someone that is maybe not a complete beginner to the world of finance, but also someone that's not dealing with things like retirement income. So yes, I put it in the title, maybe it's click bait, but these are things to avoid in your thirties, but also things to avoid in general.
So let's get right into it with number one. The first one that I would say is a mistake to avoid in your thirties is not understanding your debt and not having a plan to pay it off. So when you're in your thirties, it is very common to have a combination of things like student loans, a mortgage, credit card, car loans, lines of credit, things like that. And each one of them will have a different interest rate, different payment structure and then obviously a different value for paying each one off. So make sure you have a good handle on the different interest rates that you're paying and the different payments that you're required to make for each of those. However, if you're looking for a strategy for paying off your debt, two strategies I'll point you towards here. The first one would be the debt avalanche and the debt snowball. Here we're getting into winter. So both of these strategies, they're not mine, I didn't make them up. They both involve focusing extra money on one debt at a time. Assuming you want to pay off your debts faster than the bare minimum, having a little bit of extra money go towards debt is generally a good idea. And so where should you prioritize? So the debt avalanche is when you pay off the debts with the highest interest rates first. And so this is the thing to focus on for paying the least amount of interest over the course of your life. So by paying more towards your highest interest rate debt first, you'll knock that one off and your debt will get cheaper as they continue down the list. The thing to keep in mind is that this concept involves you paying the same amount to total debt repayment at all times. So even once you've paid off the first debt, take the amount that you were paying on that one. Say it was $200, then take that $200 and apply it to the next one. So you're doing your minimum plus now the another $200 and so on. Okay? That way you'll always be paying the same amount, but by the end, when you just have the final debts left, you'll be able to knock it off pretty.
Now the debt snowball kind of looks at the other way and doesn't look at how you can save the most interest, but it looks at how do you get the most psychological benefit from paying off debt? So when you have a variety of different debts, some small, some large. It can just be a real burden on you mentally to have all of these things to worry about every month. And so what the debt snowball says is like, Okay, take the smallest debt first and do the same thing, so pay it off first, and whatever you're paying on that one, lump it into the next one, and then your payments get larger and larger on an individual debt, but in total it remains the same, and so you're able to tackle them much quicker. So just like the snowball rolling down the hill, your payments get larger and larger because you have fewer debts to pay. Hopefully that made sense here. But there's of course, pros and cons to each strategy. So consider what will work best for you and your unique situation. So that's number one, not understanding your debt and not having a plan for paying it off. There's two ideas for paying off.
Number two, this is a critical thing for anyone at any age, but in your thirties, it becomes much more relevant, of course. But number two, not taking advantage of your RRSP matching at work. So this is one of the best ways to grow your investment portfolio, and I'm always shocked to see people not taking full advantage of this option at work.
Full disclosure, in a former life, I also didn't take full advantage of this because I didn't understand how it worked. But for people who have a workplace retirement plan, it generally involves matching, which means before you get your paycheck, some of your money goes to the RRSP and your employer chips in some as well. Many times it's a percentage, so let's say it's 2%. So you get paid a thousand dollars, 2% of a thousand dollars is 20 bucks. So you put in 20 bucks, say your employer matches another 2%, so that means that they put in 20 bucks. So you get paid a thousand bucks and 40 goes into an RRSP. I'm not saying that that's exactly the percentage that you have. Many employers have significantly higher matching then that. But the thing to keep in mind is that when they put in that money, that is a massive benefit to you. I'd call it a hundred percent return on your investment. I want to be careful about that of course because it's not actually investment returns. But if you put in some money and you get some additional money, take the free money. This is one of the best ways to build your retirement saving. The great thing about RRSP matching is that you receive the asset, which is generally an investment in mutual funds or ETFs, usually with an insurance company or something like that. But you get the asset without a tax bill because your employer can deposit it into your RRSP pre-tax. And if this is the case, you won't receive a tax refund for the contribution like you might if you were to do an RSP contribution on your own. But you don't get a refund because you didn't pay tax on it in the first place. In my mind, this is the purest, most perfect version of using an RSP because you get free money from your employer and you don't pay tax on it today. You pay tax on it when you take it out in retirement. You don't need to wait for a refund from cra and you don't need the discipline to invest that refund. Again. If you haven't listened to my RRSP podcast in the past, you'll know that I think RRSPs are often more complicated than it's worth.
However, if you have an RRSP matching plan at work, that is the no brainer of the year, you have to take advantage of that. So not taking advantage of the company match is a huge mistake that you want to avoid. Yes, especially in your thirties, largely because your income is finally at the place where it really makes sense and you're probably in a career that that might have an RRSP matching.
Mistake number three, not contributing to your TFSA. This is the hill that I'm going to die on. The TFSA is another vehicle for growing your investment portfolio, but it has different rules than the RRSP, of course. I have a number of episodes about TFSAs and I'll probably do some more. I might do another one before year end here. But for those of you in your 30’s, this is particularly important because you have enough time on your side, plus enough contribution room over your lifetime that using a TFSA could very well be the primary account you use for retirement savings. And if you think about that, you could have a tax-free retirement. There's a lot of other benefits that come along with that because any withdrawals from your TFSA never hit your tax return. Some other income tested benefits that you could have in the later years could show up for you as well there. I'll be vague intentionally there for now, but prioritizing TFSA now is critical. So for those of you who are new to the podcast, I advocate for the TFSA to be thought of as a T F R A or tax-free retirement account because no, you don't have to just save cash in a tax-free savings account. You can invest and so by a tax-free retirement account, I just mean that you should use it for long-term investing, not for short-term savings with regular withdrawals going in and out, saving for the next car, the next vacation, things like that. The tax free compounding of a TFSA disproportionately benefits those of you in your thirties because you have both enough time on your side to get the benefit of long-term compound before you need it for retirement. Plus, you also have enough contribution room to make the account worth a significant amount over the course of your life. So if you're listening to this right now in 2022, or in if you were born in 1991, you have the full maximum contribution room that anyone older than you also has. So you have the most time and most contribution room available to you. If you're in your thirties and you are looking at increasing your financial wellbeing over the course of your life, please consider using a TFSA. The TFSA is a financial miracle. Other countries have it slightly better than us here in Canada, but here the TFSA is about as good as it gets. I'll stop myself there before I get too excited.
Number four mistake to avoid, not having an emergency fund. This one's a little boring perhaps, but boy, we're theoretically going into an economic recession here. The biggest impact of a recession is a loss of job. If you lose your job, car breaks down, kids get sick, dog needs an operation, whatever. Emergencies happen all the time. So I would say start by building up your emergency fund to a thousand bucks. Do whatever you can to save your thousand bucks. Keep it in a savings account. Don't buy a GIC. The money's locked in. Don't worry about getting a rate of return on the money. You do not care about rate of return on your emergency fund. You want access, quick access to it as soon as you need it. Because when an emergency happens, emergencies usually don't wait for you to come up with the cash, okay? So you need to have it ready. I recommend just putting it in a savings account, not a tax-free savings account. Just a regular old, boring savings account at your bank, okay? So build it up to a thousand bucks. Once you're at that level, then focus on slowly building it up to approximately two to three months of essential spending. You could do more than that. That's a lot of money. But two to three months of essential spending. Note how I didn't say income, because income is used for investing, going out, gifts, having fun. Those are not emergencies that you need to cover with an emergency fund. You need to cover your mortgage, your rent, your utilities, groceries, things like that. But those are the critical ones. Okay. So two to three months of essential spending, depending on your financial situation. Sometimes some people could use a line of credit for emergency fund, but I hesitate to even mention that because it kind of becomes a compounding issue, like in the example where you have a life emergency and then you use a line of credit to cover off any expenses associated with it. Well, now you have had an impactful life emergency plus growing debt with interest. And right now the interest rates as high as they are, lines of credit really aren't cheap anymore. And so having cash on hand is going to be valuable for you. So make sure you have an emergency fund, not a really fun one to think about here, it's not really getting ahead, but it's playing defense a little bit with.
Number five, keeping up with the Joneses. So what that means is seeing your friends and family and people on social media and whatnot, and trying to emulate what you see with your own life. So it's a mistake I see with people in their thirties. all the time. Just because your friends and family members are doing something doesn't mean you have to do it too. Just because they're buying a house, doesn't mean that you need to buy a house. Just because they're taking an expensive trip, doesn't mean that you have to take an expensive trip. Clothes, cars, technology, vacations, dinners out, expensive kids clothes even, I'm learning that now with two kids at home. Boy, kids clothes are expensive and there's fancy things that you can buy for that kid. Parent gadgets, things like that. I'm guilty of some of these myself, to be honest. But it's a never ending battle that just creates more waste and fills your house with stuff you don't need. It empties the bank account and it creates a host of negative mindsets because you'll never have enough. Right? Just constantly thinking, look at someone else. Boy, that would be nice to have. Right? You'll never have enough. Your stuff's never good enough. You're not healthy enough. Whatever. Likely hardest for the 30 something group because you're in a really unique stage of life. Speaking to myself here too, but we're in a unique stage of life where career is becoming more solidified, so your income is higher than it's ever been, so now you have the capacity and need to make more money decisions. What do people do when they need to make a money decision? Well they look around and see what other people are doing? Right. So if you look around and you see that people are buying things that you want or things that are more expensive than you want, you might try to find a way to make it work, and it's not always ideal.
So comparison in general is just something that you want to avoid. Even things like with your income. So think of like a surgeon, again someone who's in their thirties. This is someone who's been in school for probably, let's just call it 15 years. They have nothing but debt and stress. Those are the only things they have. But while you might have been graduated from university years ago, and you might be on a second career already, you got married, bought a house, whatever. Now the surgeon's income, now that they're finally working is now way higher than yours, but they have tons of debt. So they're kind of almost starting from scratch. However, their income is immediately higher than yours, but their income upside has already been capped. But it doesn't matter that they hit their income earning potential immediately because that starting income is so high. Anyways, I'm just kind of talking about the extremes here because there's a reason why we call it personal finance, right? Because your situation is way different than anybody else's that you know. So what you want to focus on, instead of comparing yourself to anyone else's situation, even if you think it's similar, you never really know what's going on with somebody. But instead of comparing, focus on learning good behaviors and focusing on the things that matter to you and your situation is way more valuable than comparing yourself to others.
Speaking of focusing on the wrong things, number six, focusing on the wrong things. So this one is more related to your investments than anything else. Maybe I'll get some pushback on this, I think there's pretty good evidence to say that this is true, but when you're in the early years of your investment life, focusing on the small things matters way less than maybe the media, commercials, whatever would like you to believe. When it comes to investing, the thing that really matters more than anything else is your savings rate or how much you're actively investing every year or every month. That's pretty much the only thing that matters when you're first getting started when you're in your thirties, largely speaking, you are just getting started. Considering your investment timeline is probably many decades further, you could have been investing for quite a while already, but in the grand scheme of life, we're still at the early stages. So investment fees and returns, yes, they're important, Full stop. Okay, Hear me. These are things that are important for sure, but when your account is small, it honestly doesn't mean that much. I mean very little. Your time and effort is way better spent on things like figuring out how to increase your income or finding ways to put more of your existing income to work. Let me give you a rule of thumb. You should focus on how much you're adding to your investment almost exclusively while your account is smaller than your annual income. Okay, so if your account is smaller than your annual income, let's say you make $75,000 a year. If your investment portfolio is 50,000, focus on getting that number up to 75,000. And it's not going to happen by cutting fees and earning a better return necessarily. Yes, at the margins it'll work, but your ability to save $5,000 is going to be way easier than you earning 10% per year. So once you've invested more than your annual income, if you want, you can start optimizing for the long term by focusing on some of those smaller things. In all cases, though, in all cases, please remember to diversify, diversify, diversify between companies, countries, and asset classes, and stay within your risk profile of course, I hope that goes without saying. But even when you're first getting started, if you have a great diversified portfolio that's simple and easy to understand, and it's something that works, you don't need to make it complicated. You can if you want. There's always ways to make things more complicated, but generally speaking, focusing more on your effort, on your savings rate is going to be critical for you. This one is less of a mistake, but more just a waste of time or to not waste your time anyways. So focus on the right things and the mistake to avoid is focusing on the wrong things.
Last one here that I'm going to talk about is not having the right types of insurance. So insurance allows you to have protection over low likelihood, high impact events. Things like home insurance and auto insurance. You have to have those to own a house and to put a car on the road. But I'm talking more so about things that you can own on yourself. The first one that I'm going to talk about is disability insurance. Disability insurance covers you if you are unable to work. It is specifically related to your employment income.
Life insurance is the second one, and life insurance should be called death insurance, marketing isn't nearly as good there, but life insurance provides a benefit if you were to die. These are the two big ones that I would recommend that you focus on. There's a variety of other insurances that you could get.
These are the two ones that I would make sure that you have in place. The nice thing is that if you have a benefits package through your workplace, chances are you are already paying for LTD or long term disability insurance. Usually this covers as much as you can actually have, which is about 67% of your income. So if this is the case, you wouldn't benefit from buying more and actually you wouldn't be able to claim anymore than that, because from an insurance company's perspective, it always has to be more beneficial for you to go back to work than to stay on disability. So you can never have multiple disability policies that will end up paying you more then what your income would've been in the first place. So if you already have it at work, great, Make sure you look to see what you have. It's definitely worth looking to make sure that you're covered in case of disability. I've seen some disability policies that are just flat rates, or they don't go all the way up with your income. In some cases, you can buy additional to make sure that you do get 67% of your income. But make sure you look, talk to your HR person, have a look at your benefits package to see what you have for disability insurance. Now, life insurance can be a bit more complicated because there's so many different products. The two main ones are term and permanent. Term insurance covers you for a set period of time. I think 10 years you're covered for 10 years. At the end of the 10 years, it'll automatically renew for a higher cost, but you don't have to reapply or anything like that because they know that you're 10 years older and 10 years sicker, and so they're going to charge you according.
You can always replace it if you are healthy and things like that. I'm not going to get into that too much here, but having term insurance is cheap because it is only for a set period of time and it can cover a large need. Like if you were to pass away, you might want your spouse to have the mortgage paid off, replace your income for a number of years, maybe set aside some money for education for your kids, things like that. Term insurance is a really great way to go, especially if you're in your thirties. The alternative is permanent insurance. It can be useful for covering costs way in the future because thank goodness you're the likelihood of you dying in your younger years is really low. However, there's always a cost associated with dying. Things like funeral expenses, in some cases a tax bill, many other things. And so permanent insurance can step in for covering those. The reason you might want to have some permanent insurance now is that most permanent insurance has something called a level premium, so you can lock in a lower price today. However, most people don't actually need much permanent insurance, in my opinion. A small amount isn't crazy by any means. I have a small amount. I have something called universal life, but the vast majority of my coverage is term insurance because it’s much more affordable. There's a product called Whole Life that's often sold as Secrets of the Rich, things like that. Taking out loans against insurance policies, all this complicated stuff. For the vast majority of you listening here, it's not really something that makes it a lot of sense and is usually more expense than it's worth. So I wouldn't recommend that, I can feel comfortable recommending things on mass here on the podcast. But an unexpected death or your inability to earn an income is absolutely devastating for your family and their quality of your life. No one wants to pay for insurance, don't get me wrong, but ignoring it is critical mistake that you want to avoid. So making sure you have enough disability insurance and enough, at least term insurance to cover off your debt and income replacement. That would be critical. I'm sure there are many, many other financial mistakes that you want to avoid in your thirties and beyond but let me just summarize these again here. And so the seven ones that I talked about, were not understanding your debt and not having a plan for paying it off. Number two, not taking advantage of your RRSP matching at work. Three, not contributing to your TFSA. Four, not having an emergency fund. Five, comparison and keeping up with the Joneses. Spending money for the sake of looking better for your friends and things like that. Six, focusing on the small things instead of your savings rate. Focus on your savings rate as much as possible. And seven, not having the right types of insurance. Make sure you have enough disability coverage and life insurance to make sure that you and your family are taken care of in case the worst should happen. If this was interesting to you, thanks so much for sticking around to the end of the podcast. I really appreciate it.
If this is your first time listening, hit follow, maybe share it with a friend, someone who could benefit from something like this. But thanks so much for joining me, and I'll see you in a couple of weeks.
Thanks for listening to this episode of the Canadian Money Roadmap Podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal, and tax advisors before making changes to your financial plan. Evan Neufeld is a Certified Financial Planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.