Your 40s are an exciting decade as your children might be preparing to move away from home, you are near the top of the corporate ladder at work, and you might finally have a large disposable income that allows you to spend a few extra dollars on yourself. As this decade will serve as a transition from being a parent to thinking more about retirement, avoiding these money mistakes can keep your finances on track.
Invest Too Conservatively
Pitfall: The 40s are probably your peak earnings decade, and you still have 10-20 years before you retire. Some 40-year-olds adopt a conservative investment strategy too soon.
Due to your high salary and lack of bills like student loans and a large home mortgage payment that consumed a large portion of your salary during your 20s and 30s, you have more money to invest in your 40s than ever before! While you might not be as aggressive as a 20-year-old, you can still invest mostly in stocks.
Solution: You need to choose an investment strategy that complements your risk tolerance, but, you should be able to invest at least 70% of your investment portfolio in stocks. Also, try to invest at least 25% of your income to max out your retirement accounts every year.
Expensive Home Remodels
Pitfall: Now that the house is paid in full or you are getting ready to buy a “retirement home,” you might want to pay for an expensive home remodel or upsize to a larger home.
While your home might need necessary upgrades like new flooring, windows, or paint from normal wear and tear, you might want to think twice about doing an expensive remodel or buying a new house to finally live in your dream house. A larger home means higher property taxes, utilities, and insurance payments.
Also, when your children move out in a few years, will you really need the additional square footage? Just something to think about.
Solution: Do make necessary repairs and upgrades that can help improve “curb appeal” if you plan to sell or want to improve the living conditions of your house, but, do not sacrifice your retirement fund or life savings to improve your house as the financial return on investment isn’t guaranteed.
Putting College Before Retirement
Pitfall: Parents want their children to enter the workforce debt-free pay for their college degree when they cannot afford the expense themselves.
College is more expensive now than it has ever been. With noble intentions, parents take out student loans or “borrow” from their retirement savings to pay tuition. Parents busy paying back the loans or their retirement funds may have to delay retirement or “move in” with their children to afford retirement.
Solution: If helping pay for your child’s college diploma is an important goal, contribute what you can and have them pay for the rest, even if it means co-signing their student loans. Use the Personal Capital retirement calculator to see how much you can afford to divert from your retirement contributions and still reach your retirement goals on time.
Not Building an Emergency Fund
Problem: Perhaps you neglected to build a large emergency fund to focus on getting out of debt, paying for family activities, or simply living a paycheck to paycheck lifestyle.
Several times a year, a study is released showing that too many Americans would have to go into debt if confronted with an unexpected expense as little as $500. Just because you might be in your peak earning years doesn’t mean you don’t need an emergency fund.
Life might be more complicated now than when you first graduated college as you have a family, a house to maintain, and maybe even the occasional doctor visit for aches and pains. You need an emergency fund that can absorb six months of living expenses if you were to be out of work.
Solution: Talk with a financial advisor or use a budgeting app like Personal Capital to make a savings plan to build up your emergency fund. If you have nothing saved for an emergency, first start with saving $500 and gradually build up to six months. A good savings target is $100 until you get into the habit of saving and can reduce your unnecessary expenses as much as possible.
Ignoring Your Health
Problem: Your body starts to wear down each decade of life and you are no longer as invincible as you were in your 20s.
When you turn 40, doctors will recommend more preventative exams and procedures. These annual physicals and routine exams can help prevent more expensive medical procedures in your future years.
Solution: Go to the doctor regularly. Also, engage in healthy behaviors like regular exercise and avoid junk foods to potentially prevent ailments. Being proactive in your younger years can save you a lot of money in the future. Consider opening an HSA (Health Savings Account) to pay for medical expenses tax-free.
Stagnating Your Career
Problem: You might think you no longer have to climb the corporate ladder after “paying your dues” during your 20s and 30s.
Your 40s and 50s are your peak earning years and it can be ample opportunity to look for new promotions that can boost your salary. If you don’t like your current job and can afford a career transition, you are still young enough to change employers and work a job you enjoy for your remaining working years.
Solution: Firstly, if you are happy with your current employment situation and are on-track to accomplish your money goals, don’t make any changes. If not, consider seeking a promotion now that the children might be old enough to work longer hours. Or, also look at switching employers are taking up a side hustle to make a few extra dollars in the evenings.
Some people call your 40s the “Sandwich Decade” because you have usually established your career at this point and are no longer a new parent. But, your children probably haven’t moved out quite yet and you still have two full working decades remaining. Use your 40s to catch up from your cash-strapped 20s and 30s, and, you still have time to be aggressive with your investments and savings to pursue your financial and personal goals.
Not Sure How to Start Investing?
I opened up my first investment account back in 2012 after paying off a lot of debt. That account was with Betterment. Since then, I haven’t looked back. I love the simplicity and ease of use they provide. I think their system is good for any type of investor. If you want to get into investing, check out Betterment.