Financial priorities for 30 - 40 year olds
Many people in their 30s to 40s are starting to get career-focused, buy homes, settle down and have kids. If you haven’t set up your retirement savings then you need to start ASAP so that you can benefit from compound interest. Even just a few years of saving early on can grow enormously thanks to the 8th wonder of the world!
It is worth noting that retirement savings is not only about having a retirement annuity or a pension fund but it is about creating a pocket of wealth that is going to produce an income that you can live off. Retirement products can be very tax-efficient but there are multiple ways to grow your wealth and produce income. This is why it is crucial to speak with an independent financial planner and get objective insights. It is worth noting that not all financial planners are equal and you should be doing your own due diligence on them before entering into a relationship.
The other big financial expense at this stage is either saving for a down payment or paying off a bond. You will see below that a little extra can go a long way!
These are the priorities in a simple checklist
- Think long term – Plan for income once you stop working, consider taxes and think of the potential expenses to come (education, caring for parents, medical expenses etc.)
- Manage expenses – Pay off your debts starting with the highest interest rates, live a sustainable lifestyle and monitor your spending
- Protect your lifestyle – Make sure your partner and dependents are covered
- Insure your valuables – Self-funding the replacement or repair of things like your car, cellphone or home can ruin your long term plan
(Our assumptions below are based on long term assumptions and not the current interest rates.)
Let’s have a look at an example about putting extra money into your bond:
- A bond of R1,000,000 with an interest rate of 11.5% over 25 years.
- Your monthly repayment would be R10,165.
- If your repayment was made in advance instead of arrears, the term would reduce by 16 months and you would save over R160,000!
- Another way to say the above point. If you pay one additional payment in your first month you will save R160,000
- If you increase your repayment by 5% (around R113 per week), Your term would reduce from 25 to 20 years.
Insurance is also important in this phase of life. If you haven’t started your medical aid yet and you are in your early 30s, you will get a late joiner penalty which will increase your fees for the rest of your life. This can be avoided if you commence your medical aid before you turn 35 so be smart!
A rough rule of thumb for your retirement savings is that by the end of this decade, you should have at least 3 x your annual salary saved. Remember to make the most of the tax savings available to you through your retirement annuity and tax-free savings account.
Financial priorities for 40-50 year olds
In theory, during this decade, you are reaching your earnings ‘peak’ and you should have a better grip on your household expenses. The temptation to splurge on something like a sports car might be real but don’t forget to look at your big financial picture and see if you can actually afford it.
In the short term you should by now have a solid emergency fund set up and some provisions set aside for your children’s education (if you don’t then now is the time to do it).
In terms of insurance protection, if you don’t have good medical coverage, it may be worth increasing this especially while you are still in good health (as it will be a lot more cost effective than trying to increase it in another few years when your health may start deteriorating). It is also worth looking at a life insurance product that would provide a payout for your family or to cover your debts if you passed away.
This phase of life is a good one to ‘get your ducks in a row’ so to speak while you still have some time to do it. If you happen to have all of these things in place then get the sports car or take the trip!
A retirement annuity is an investment product that is used to save up for life after retirement. The tax deductions included in this product make it an extremely advantageous over the long term
A tax-free savings account is an investment product that is completely free of any tax. The maximum you can investment each tax year is R36 000 with a lifetime limit of R500 000.
A late joiner penalty is an increase applied to your medical aid premium if you have joined a scheme after the age of 35. The penalties range from 5%-75% depending on how late in life you join a medical scheme.
