The 6 Top Financial Tips for 40-Somethings

 In Personal Finance, Retirement

financial tips

It has never before been so crucial that you are able to make smart decisions with your money.

Whether you’re planning for retirement at 65, or you want to build a larger nest egg and retire early, it is absolutely vital that you make savvy choices with your money.

We’ve created a list of the six most important financial tips for 40-somethings to ensure that you’re able to do just that.

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Save for Your Kids’ College

If you’re in your 40s, and you have children, now’s the time to start socking away money for their college tuition (if they intend to go to college – it’s not the right path for everyone).

Considering the fact that there are now 40 million people in the US saddled with crushing student loan debt, the more you can help your kids out, the better they’ll be able to live after graduating.

A 529 college savings plan will help pay for your child’s college and reduce the amount that must be borrowed to fund that education.

Traditional IRA and Roth IRA are also good options to save money for children education tax efficiently.

You may also want to consider a prepaid tuition plan at the school your child wants to attend, as this will also help reduce the need to borrow money.

Don’t Upgrade Your House

When we’re young, we all dream of living in a nice, big house.moneywant space. We want elbow room. Whether you always dreamed of having a dedicated library in your home, a massive entertainment room, or just tons of land, this is something to which we can all relate.

Don’t succumb to the temptation. Don’t upgrade your house too much.

While there’s nothing wrong with buying slightly larger to accommodate a growing family, avoid the urge to go too big. Super-sized houses end up being little more than money sinks, and once your kids grow up and move out, you’ll be faced with a house you have to sell because now it’s too large.

That doesn’t even touch on the fact that super-sized homes come with super-sized payments.

Plan for Retirement

You have a lot of expenses right now, and you might be tempted to wait to save for your retirement, at least until you have college tuition handled for your kids.

Don’t do it. The longer you put off retirement savings, the less you’ll have when the day actually comes.

If you’re forced to choose between saving for retirement and saving for your child’s tuition, always choose retirement. You can always find low-cost loans to pay for school, but the same cannot be said for funding your lifestyle in your golden years.

You also need to consider the fact that investment returns might be much lower than historical averages over the next several decades.

Let’s assume you’re 45 years old, leaving you a meager 20 years in which to build your nest egg.

Assuming you’ve already saved $100,000, need about $1,000,000 to retire comfortably, and an estimated 3% return on your investment, you’d need to save more than $2,700 per month, every month for the next 20 years.

early retirement

Plan for Your Income to Flatten

Your 40s are the time of your life when you’ll feel most financially secure. That’s great, but it can lead to a false sense of security.

Most people find that their income peaks, and then flattens – your annual salary will stagnate, and you will not see many raises in the future.

In fact, the best years of your income might be behind you at this point, depending on your career and where you’re at in your 40s.

As you approach 50, you may even see your income begin declining. Plan for this now, while you still have time.

Any excess money should be put towards retirement or invested in a vehicle that offers lots of protection, but also the potential for above average returns (think individual corporate bonds).

You might even need to think about taking on a second job or a business to augment your savings.

You Need Life Insurance

In your 20s, it’s easy to dismiss the need for life insurance. You’re young. You’re healthy. Who needs the extra cost?

In your 30s, it’s still pretty easy to ignore life insurance, particularly if you’re in good health and so is your spouse.

However, during your 40s, your expenses are going to peak. You’ll have kids in school, possibly some in higher grades and some in daycare. You’ll have more payments to make each month, and they will be higher than what you were paying in your 20s or 30s.

Term life insurance is still relatively affordable in your 40s, and it can be a very wise purchase. This will protect your family should something happen to you or your spouse, rending that income unavailable.

Invest Based on Your Specific Goals

Too many people in their 40s find investment formulas that say to avoid investing conservatively and end up with 75, 80 or even higher equity allocation.

That’s not the right path.

Understand that investing, when everything is said and done, is personal. It’s tied to your goals and your plans. It’s about satisfying your needs, not someone else’s.

This means you need to make smart investments and then stick with them to ensure that you avoid the damage that can be caused by “abandoning ship” mid-journey.

Ideally, you should stick with your allocation no matter what the markets do, even if things aren’t looking particularly bright. That means it might be wiser to go with 60% stock allocation, even if conventional wisdom says that is too conservative. There is nothing wrong with slow growth.

The remaining 40% of your portfolio should be allocated to individual bonds.

However, make sure that you’re not buying into bond funds, which are not the same thing. Individual, high-quality corporate bonds offer the ability to plan well because you know the maturity dates and can create a bond ladder.

Bond fundsare completely different and actually work more like stocks  than actual bonds.

They also come with higher risks, as well as the chance that you’ll lose not only any gains, but your investment capital itself.
Bond Investing Fundamentals

Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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