If you spent your 20s job-hopping, budget-traveling and otherwise soul-searching, your 30s are likely a welcome reprieve from this near-constant state of uncertainty. Your 30s also come with a unique set of challenges, however, especially when it comes to finances.
Though personal spending and budgeting habits vary from person to person, there are some financial commonalities that stem from being a certain age. For example, 30-somethings are more likely to own a house compared to people in their 20s, while 40-somethings typically spend more on health care compared to people in their 30s.
[See: 10 Ways Millennials Are Changing Homebuying.]
Financial professionals across the country shared their top budget busters for 30-somethings, as well as advice on how to overcome these challenges and temptations.
Since 30-somethings are more likely to have stable jobs and mature credit histories, a desire to escape the clutches of unreliable landlords and difficult roommates is understandable. However, this eagerness can contribute to poor decision-making, due in part to how the lending game works.
“Many people in their 30s become house-poor,” says Robert R. Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania. “House-poor” means spending the majority of your income on your mortgage and associated housing costs. “A common rule of thumb often advanced is that you can afford a home that is 2.5 times your gross income,” he adds.
However, mortgage payments alone do not comprise the total cost of owning a home. There are also utilities, homeowners insurance, maintenance costs, property taxes, homeowners association fees and other expenses. “Those costs are often budget breakers and homeowners neglect other financial goals, such as funding retirement accounts and saving for kids’ college educations,” Johnson says.
Michael Fuhr, certified financial planner and financial advisor for SageVest Wealth Management in McLean, Virginia, suggests that people ask themselves not how much they can afford, but how the cost of a new home will fit within their financial goals. “Make a realistic budget that gives you flexibility to handle unexpected expenses,” he advises. “Don’t just assume the amount a mortgage broker gives you is the best amount for your budget.”
[See: 11 Expenses Destroying Your Budget.]
You should also consider how future milestones will impact your overall finances and ability to pay your mortgage. “[Thirty-somethings] buy houses that may be pushing their budgets before they have kids and before day care costs,” says Benjamin S. Offit, certified financial planner and partner for Clear Path Advisory, Inc. in Pikesville, Maryland. “Then, when they do eventually move into the family direction, they feel strapped.”
Credit Card Debt
With homeownership costs and student loan debt consuming the majority of a budget, credit cards are often used to help cover other expenses. “The past seven years have been an extremely tough environment for young people to build credit,” Sunstrom says. “It’s not uncommon to see those holding credit cards in their 30s paying interest in the neighborhood of 20 to 25 percent.”
In February, Bankrate’s Financial Security Index found that over one-quarter (26 percent) of people ages 30 to 45 had more credit card debt than emergency savings. Without adequate savings, unexpected expenses are funded by credit cards and further exacerbate consumer debt. Offit advises clients in this situation to categorize spending into past, present and future expenses and “identify ways to systemize their budget so we can ensure they are living within their means and knocking down their credit card debt.” Offit also helps clients look for ways to shift credit card balances to interest-free credit cards, with the goal of paying off balances before the promotional period expires.
[See: Best Credit Cards | Find the Right Card for You.]
Lifestyle Inflation
When you land your first full-time job, it’s easy to let a steady paycheck influence your spending habits. Lifestyle inflation, or buying pricier items to reflect a higher income status, typically sabotages a consumer’s ability to enjoy his or her newfound prosperity.
“In your 20s, you are generally happy with a $2 beer and a burger,” says Pauline Paquin, a personal finance expert and founder of the blog ReachFinancialIndependence.com. “In your 30s, you feel like you deserve a good dinner and a few drinks after a tough day of work.” Paquin warns that this approach to dining out (and other expenses) adds up quickly over time.
David Hryck, a tax lawyer and personal finance expert for the law firm Reed Smith in New York, agrees with Paquin’s assertion, citing the financial burden associated with buying fancy cars and bigger homes. “People in their 30s tend to think they can afford these luxuries at this stage in their life with the thought that they will make more in their 40s and 50s.” This assumption fails to factor in life events that often occur in your 30s, like getting married and having kids.
[See: 13 Money Tips for Married Couples.]
In addition to housing and activities, lifestyle inflation also manifests itself in car purchases. “It’s not uncommon to see people our age buy cars that hold a value equal to 40 to 50 percent of their annual income,” says Corey Sunstrom, certified financial planner and advisor for Hobart Financial Group in Charlotte, North Carolina. Sunstrom reminds consumers that “every dollar you spend on driving a depreciating asset is a dollar that could be growing for you in savings to fund future goals.” It’s smarter to spend 20 to 25 percent of your income on a car, or just 10 percent if you’re really frugal.
So, fellow 30-somethings, don’t allow that steady paycheck to cloud your judgement when purchasing a home, picking a restaurant venue or swiping your credit card. Instead, harness the penny-pinching ways of your 20s and the retirement-focused habits of your eventual 40s, and strike a balance that enables you to enjoy this exciting decade, free from the burdens of debt.
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Top Budget Busters for 30-Somethings originally appeared on usnews.com
