Wise choice of bread
Getting over the big 4-0 is the perfect time to reflect on how far you’ve come in life, the milestones you’ve overcome, and the relationships you’ve built. But for some people – especially those who don’t have their own financial ducks in a row – this is the time when panic sets in.
After all, when you turn 40, you may painfully realize that the time to correct any financial mistakes you have made in the past is running out. At the same time, you need to be serious about your money if you want to enjoy your golden years without financial stress. That’s why financial advisers suggest several cash transactions that everyone should make before their 40th birthday.
1. Dealing with consumer debt
Ryan Inman, physician financial planner, says it’s critical to develop a consumer debt plan well before you turn 40. This is especially true when it comes to high-interest credit card debt. With the average credit card interest rate currently over 17%, this type of debt can be difficult to repay – and a big drain on your budget each month.
If your goal is debt repayment, there are several approaches to consider. You can attack it the old fashioned way and pay as much as you can each month, or even try the debt snowball or debt avalanche methods. You can even apply for a balance transfer credit card that allows you to secure 0% APR for up to 21 months.
Ideally, you should aim to be debt-free at this point in your life other than your mortgage, Inman says.
While this may seem like a lofty goal, not having to pay interest on consumer debt will make it much easier to save more for retirement and catch up on your investments if you’re already behind.
2. Maximize your retirement savings
It’s easy to think that there’s no need to maximize your retirement savings when you’re young, but when you turn 40, you’re acutely aware of how much more you need to increase your savings.
Financial planner Benjamin Brandt, host of a podcast about retirement called Retirement Starts Today Radio, says he’s suggesting that anyone over 40 start maximizing their retirement savings. Remember that you’ll be setting your payroll contributions from your pre-tax income, so it’s not as expensive as it might sound. Also note that the maximum retirement age contribution will reduce your taxable income, which could mean less income tax this year.
If you can’t contribute as much as you can, Brandt says, try to contribute more than you do now and raise your goal a little every year until you reach it.
Brandon Renfro, assistant professor of finance and financial planning at Hallsville, Texas, says at the very least you need to make sure your retirement plan is fully compliant with the employer. Employer match is the amount of money your employer can match when you save for retirement yourself. For example, your employer may agree to contribute up to 6% of your income each year as compensation, but you must contribute 6% to receive the full amount.
Remember that your job with your employer is free money you can get and you should take advantage of any help you can get for retirement savings when you turn 40.
3. Automate your finances
Certified Public Accountant Riley Adams, who also writes for Young and the Invested, says turning 40 is a good time to try to automate your investments if you haven’t already. With more automation and self-directed cash flow, you’re less likely to spend money on things you don’t need or find yourself in a situation where you inflate your lifestyle as your income grows.
“To protect yourself from yourself, learn to set up automated financial transactions to manage your money transfers at every paycheck,” he says. “It saves you the hassle and also allows you to make better use of your money.”
For example, you can set up automatic bank transfer so that a certain amount of money is transferred to a high-yielding savings account each month. Or you can set up automatic deposits to a brokerage account. Increasing your retirement savings in your workplace account can also be considered automation, as the money is automatically taken from your paycheck and invested on your behalf. (See also: 5 ways to automate your finances)
4. Buy insurance based on your future finances
Financial planner Brenton Harrison of Henderson Financial Group says that by your 40th birthday, you should also decide your insurance needs. However, you should strive to think about your insurance needs in the future tense.
“It’s tempting to define your needs based on your current income and net worth,” he says. “But for many people, 40s is their peak earning years, which means the insurance needs you have before age 40 may not be enough as your career progresses.”
Harrison suggests that you sit down and think about where you want to be in your career and where you plan to be financially in 10 years. From there, buy insurance based on that financial picture.
“If you know you can and will reach a certain level of success, don’t wait until you reach it to start planning,” he says.
While the types of insurance you’ll need vary depending on your situation, think beyond the basics like homeowner’s insurance and auto insurance. For example, you may want to buy an umbrella insurance policy that expands coverage limits in certain cases.
Also, be sure to get proper life insurance,” says financial planner Luis Rosa.
“If you have a family or are planning to start one in the near future, it is very important to make sure they are protected,” he says. And you’re much more likely to get the coverage you need at a price you can afford when you’re in your 40s (or earlier) and still relatively healthy.
5. Create an emergency fund
If you’ve struggled with your finances over the years and have dealt with credit card debt multiple times, it’s most likely because you don’t have an emergency fund. While any savings is better than none, most experts suggest setting up a separate emergency or job loss fund for three to six months or more.
You never know what obstacles life will meet on your way, but you will be ready for almost anything if you have savings. And if you can’t save on six months’ expenses, it’s still better to start somewhere – even if you can only save a few thousand dollars.
Put your savings in an interest-bearing account and keep adding to it, and in the end you will get your way.
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