Once individuals hit their 40s, they need to focus on securing their finances so that they are ready for retirement and other demands. During this time, kids may be preparing to start college and parents may need expensive nursing care. Consequently, our 40s prove extremely stressful in terms of finances, and this makes it extraordinarily important to plan for future hurdles. The rules of personal finance change slightly once individuals hit their 40s because they generally need to become more conservative with their investments to safeguard the nest egg that they have built.
The following are some key tips that individuals should keep in mind as they enter their 40s and work toward building financial wellbeing:
Focus primarily on retirement savings.
When individuals hit their 40s, they need to make retirement savings a primary goal. Often, people think that retirement is still far enough away that it does not need to be a priority, but it approaches faster than people think. The best way to save is to max out contributions to a 401(k), take advantage of company matching programs, and then think about a traditional or Roth IRA. Importantly, individuals should try to avoid withdrawing any retirement savings. Many people feel tempted to do so to cover the costs of college, but doing that will make it very difficult to rebuild adequate savings in time. Instead, individuals should explore other options for covering major expenses like tuition.
Pay down debts as much as possible.
Carrying debts past one’s 40s makes it very difficult to save money for retirement because so much money gets diverted to these other responsibilities. When paying down debts, it always makes sense to focus on high-interest debts first, which typically means paying off credit cards before mortgages or auto loans. High-interest debt can quickly snowball, so it is important for people to minimize it as quickly as possible so that they can maximize their savings.
Maximize monthly take-home pay.
Part of saving for retirement and affording the expense that often come in our 40s involves earning as much money as possible. Maximizing take-home pay may mean different things for each person. Sometimes, making more money is as simple as asking for a raise, especially if it has been a while. Other people may want to think about taking a class or two on the side to pick up new skills and become more marketable. Individuals can also think about picking up a side gig to bring in even extra money. Establishing a side business in one’s 40s can create a steady income stream that may even last into retirement.
Align finances with long-time dreams.
People in their 40s still need to make time to have fun. This is the point in life when it makes sense for people to take those vacations that they have dreamed about for decades. While savings should still be a priority, individuals also need to enjoy the money that they work hard to make. Vacations are a great way to recharge, and spending money on dream trips now will not hurt savings too much. Waiting another decade, however, could mean making a noticeable dent in a nest egg. People should avoid saving all of their dream trips for retirement since it is impossible to predict what will happen down the road. To save for a vacation, individuals should create a separate account and contribute to it regularly.
Think about home improvements.
Once people hit their 40s, they need to start thinking about where they want to live when they retire. If there are changes that they want to make to their homes, the 40s are the perfect time to take this on. Home improvements add value to the home, therefore people should view spending this money as an investment. Individuals may also want to think about buying a new home, especially if they have children who are about to move away for college. Ideally, individuals retire without a mortgage, but this is not always possible. Before making any rash decisions, it is important to think about how purchases now will have an impact down the line.
Invest in life insurance.
When people hit their 40s, they should review their life insurance coverage to make sure that their loved ones remain protected in the event that tragedy strikes. Without insurance, children and spouses may not have a way to pay the mortgage or meet monthly expenses. Life insurance provides some degree of security. Often, people do not purchase life insurance before their 40s, so it is important to think about options and make sure that everything is covered.
Keep contributing to the emergency fund.
In general, people should establish a substantial emergency fund before they hit their 40s. Once people are in their 40s, they need to work to maintain the fund or perhaps even grow it a little bit more since monthly expenses are likely higher than they were in previous decades. Increasing the fund can help with expenses like a child’s wedding. However, once people use these funds, they need to replace them. Individuals may also want to consider investing part of their emergency fund. While the majority of this money needs to be liquid, putting a small amount into an investment account can help it grow for the future.