By Stacie Rhodes
Money is the great amplifier – your passion is fueled by your resources. In other words, “Show me your bank account, and I’ll show you your priorities” (Billy Graham). Our thirties can be a defining decade as we can either fuel our passion – to the detriment of our priorities. Or we can protect our priorities – to the restriction of our passion. The insight below builds on the latter, assuming that our priorities revolve around caring for our family and long-term financial freedom.
Establish your debt plan – eliminate consumer debt, pay down student loans, and refuse to buy too much house.
Step 1: Pay off our consumer debt first (highest interest rate loans) – credit cards, car loans, and other high-interest loans. Utilize the debt snowball method (paying off the smallest loan first) or the debt avalanche method (paying off the loan with the highest interest rate first).
Step 2: Attack your student loans (medium interest rate) – the myriad of repayment options for student loans can be extremely overwhelming. Review your repayment plan options and evaluate what you can afford to pay toward loans each month while reducing the amount of interest paid over time.
Step 3: Evaluate how much house you can purchase – write out your debt commitments and monthly payments from the above steps. At most, 36% of your gross income should go towards debt (the average percentage most lenders encourage).
Gross salary: $60,000 per year or $5,000 per month
Maximum monthly debt payments: $1,800 per month (36% x $5,000)
If your consumer debt (step 1) and student loan debt (step 2) payments cost a total of $900 per month, the monthly mortgage cost of your potential home would need to be less than $900 per month.
While there are often pressures to jump into purchasing a home, I encourage you to walk through the above process and truly evaluate your total debt commitments.
Save for future expenses and increase retirement savings.
You will continue to have simultaneous and competing priorities, but do not lose sight of building wealth long-term. If you followed the advice for your 20s, you have started building the habit of savings – now is the time to work toward the expert recommendation of saving 10 – 15% of your pre-tax income. Below are the retirement account funding orders previously discussed:
Step 1: At a minimum, contribute the amount of the employer match in your employer retirement plan.
Step 2: If you still have excess, contribute the max into your IRA or ROTH IRA (limit of $6,500 for 2023).
Step 3: Finally, defer more into your employer’s retirement – up to the deferral limit if able ($22,500 for 2023)
Build out your estate plan.
An estate plan is a directive for dividing assets among heirs and guardianship of minors and pets. The documents below can be a starting point as they are relatively simple to create with a credible attorney’s help with minimal costs.
- Power of Attorney (POA) –a legal document that authorizes a trusted individual to act on your behalf without involving the court or friends/family that may not have your best interest in mind. A “durable” POA can be a pivotal option should you become incapacitated and unable to make decisions for yourself.
- Will – Without a legal document that outlines the distribution of your assets, your state’s laws will determine who receives your property by default. Most will assert distribution to your spouse, children, or other family members, but the court’s decision can be very lengthy and public. Protect your preferences by establishing a legal will.
Review your insurance policy to ensure you have adequate coverage.
If your house is more than a few years old, the cost to rebuild your house is likely more than the cost you paid several years ago – especially during these current economic times. For example, you may have initially insured your home for $200,000. Fast forward ten years, your home could cost around $300,000 to rebuild, resulting in a $100,000 gap you would have to self-fund. Further, major purchases and improvements on your home or significant lifestyle changes can trigger a necessary modification to your insurance plan. Review your insurance annually when your policy comes up for renewal, but a more in-depth review should be done every few years.
Ladies, let’s thrive during these pivotal years! By strategically directing the allocation of our hard-earned money, we can fuel our passion and protect our priorities while pursuing financial freedom.