While having key financial skills is important at any age, it’s particularly important when you are entering your 40s. Financial planning in your 40s can be tricky. You are neither too old nor too young. Also, your parents may have retired and may have become dependent on you. Your children too would be growing up and their educational and other expenses may be increasing now.
So at this age, you are at a pivotal point in your financial life cycle, and what you do next will have a profound impact on your retirement life.
According to Northwestern University’s study on wealth and longevity, people who have greater wealth at midlife tend to live longer(!)Researchers note that building wealth is important not only for wealth but also for health at an individual level and that financial security should be considered in various policies. Unfortunately, many people in their middle age still live paycheck-to-paycheck and are unequipped with the financial skills needed to prepare for a comfortable retirement.
Truth be told, your 40s represent the busiest decade of life. You’re entering your highest-earning years and greatest career opportunities, so time is still on your side – but not for long. Financial maturity also means planning adequately to care for both growing kids and ageing parents. Your 40s are the last big stretch to save and invest because once you hit 50, you’ll need to start spending less and adjusting your lifestyle for your golden years.
Here are 5 financial skills you should master once you hit this decade:
Sticking to a monthly budget
Most people in their 20s and 30s play around with the idea of budgeting, but few actually stick to any kind of budget at all. It’s important that you tailor a budget to your specific habits. Carleton University’s research on financial self-control indicates that personally generated self-control strategies are likely to be more effective in achieving financial goals than provided strategies because these fit the person who generates them better.
One basic and extremely simple rule to follow is to save and invest a part of your income first, then spend what’s left. If you have a loan that you’ve grown comfortable with since your 30s, do try to include payments in your budget because otherwise there’s a risk you’ll be paying it off for the rest of your life (something like a big home loan with long tenure).
Also, in your 40s, your earnings might be increasing at a pace faster you’re your expenses. So higher earnings can mean higher standards of living and higher expenditure. This may often upset the savings plan. This is where budgeting helps in keeping the guardrails on.
Have an Emergency Fund & Insurances in Place
Do we even need to discuss this point? I am sure you already know why having an emergency fund in place is super important to not allow unexpected events to derail your financial life. The same is the case with health insurance and life insurance. In either case, it is a crime (towards your family) to be underinsured.
Maintaining a high credit score
Higher, more stable income in your 40s is often partnered with offers of better credit limits or flashier credit cards. Do you also keep getting unsolicited pre-approved loans offers/
However, knowing how to use your line of credit responsibly is another story. And you’ll want to maintain a good credit score, at all times, to get good interest rates from lenders, especially if you’re looking to buy properties soon. And the rule of good credit management is universal. Borrow only what you need and which is not unnecessary. And always pay on time. Based on AskMoney’s tips for managing your credit score, you should know how your payment history, the total amount you owe at all times, and length of the credit history, factor into your score.
Most adults in their 40s average a score between 683 to 689, unless their debt levels peak. But in India, a Credit score of 750 or above in your credit report is ideal. To ensure your credit score stays at high levels, you must pay your bills on time as much as possible. Look into automating your bill payments, and be sure to check your credit report once a year for mistakes and errors.
But what if you have a good credit score and also a running loan?
I think that your 40s are also a good time to focus on starting to clear off your loans quickly. Develop a step-by-step plan to eliminate debt without compromising too much on your savings for other important goals like children’s education, retirement savings, etc.
Saving up for retirement
When you are in your 40s, how can you not discuss saving for retirement?
Isn’t it?
If you have just turned 40 and do not yet have a set plan for your retirement needs in place, it is extremely important for you to start saving for your golden years. The World Economic Forum’s insights on millennial finance habits note that people born between 1980 and 1994 have a 10-year head start on saving for retirement, compared to the generation before them. You’re likely already aware of how important it is to save for retirement, but your 40s are a time where you should take it to the next level.
Every time you get a raise or receive a bonus, try to contribute these to your retirement fund so you increase your savings a bit each year. Treat your retirement as a bill you need to pay because the power of compounding can be significant down the road. Saving more, earlier, is better for your future. Please remember that your provident fund will not be enough for retirement. You need to invest more. And the best option is to invest in equity mutual funds via regular SIP. Equity is the only reliable option to generate inflation-beating returns in the long term. And taking the SIP route is your best bet.
Balancing the Right Kind of investment in your portfolio
Turning 40 can be a new point in your life as an investor – and if you’re not, you’re still at a good age to start. As mentioned in another article on Financial Planning in the 30s, your 30s mean you can afford to take risks and invest in equities for the potential high reward.
However, your 40s edge closer to retirement so you want a good mix of aggressive and stable investments. You’ll have time to earn more from risky stocks and see the market recover in case of volatilities while investing in more stable funds provides a solid financial foundation for your strategy.
If you feel you are not in control of your finances or are unsure how to move forward, then your 40s can be a great time to speak to an investment adviser as well. Whether you’re looking for advice in relation to saving for retirement, loan closure, saving for children’s future, asset allocation, a good financial adviser will be able to offer you expert advice and help you make the right financial decisions for your unique situation and goals.