With age comes wisdom, so they say — but it also comes with more complicated lifestyles. By the time we reach our 40s, we expect to be savvy, certainly capable of making good financial decisions, and generally well on our way to reaching our goals. But from what I can see, it’s often not the case.
We are still in our 30s, but our friends and cousins are stepping into their 40s. I notice the decisions they make and the new struggles that come their way, and it’s making me think about the money mistakes I would like to avoid in my 40s.
- Lifestyle spiraling out of control: Speaking of complicated lifestyles, most people reach their peak earning potential in their 40s or early 50s — and those bigger paychecks make the possibility of lifestyle inflation more likely. Bigger cars, fancier vacations, after-school sports, music, dance classes and eating out more often. Life gets busier, and it’s just easier to let these expenses grow until they’re out of control.
- Supersizing your house (or doing fancy remodeling): By 40, you’ve probably been living in your house for a few years and the itch to move to a bigger place (using kids as a reason) or to upgrade to a fancy kitchen or Pinterest-worthy bathroom starts to kick in. You might figure that, because you’re earning more now than when you first bought the house and because remodeling is suppose to increase the house value, why not remodel? Well, for one thing, most remodels don’t move the value of the house up as much as you’d think. Secondly, most of us don’t need a bigger house. Census data shows that the median and average house sizes have been increasing consistently since 1973 whereas the average household size is actually shrinking.
- Keeping your emergency fund balance static: Do you have an emergency fund? Great! If you created the fund and haven’t revisited it, then you might find that it is woefully inadequate for your current needs. With a bigger paycheck to replace, inflated expenses and more kids to support — and a hefty mortgage payment to boot — an emergency fund balance determined on income 10 years ago won’t cover three months anymore. It might be the equivalent of just one to two months’ pay or expenses today.
- Not taking care of your health: This is true for any age, but people in their 40s tend to get super busy with their kids and life just takes over. But not taking care of your health now could translate to a lot of medical expenses in your retirement.
- Deciding you’re too old to start saving for retirement: Hopefully by now you are on auto pilot when it comes to retirement savings. If not, it isn’t too late to start. It’s never too late to start. Do not dismiss putting money away for retirement, even if you’re starting late with just a little bit of money in a high-interest savings account.
- Thinking you’re too old to switch careers: By this point, you might have close to a couple of decades of experience in your career. Don’t allow longevity to make you think that you’re stuck in this career forever. With the number of online platforms like Etsy, E-lance or Amazon Handmade growing, it has never been easier to dip your toes in and start the entrepreneurial dream you have without giving up the security of a paycheck. It’s not too late to start a business or change careers (even while you work full time), if you have that opportunity.
- Being complacent in your current job/not trying to advance: In our 20s and 30s, we can be quite aggressive about going after promotions, pay raises and better job prospects. But in our 40s, complacency can set in, giving rise to a feeling that the years of competing are behind us. Why should we think that? There are plenty of ways to structure work hours to have a good work/life balance and still go for that corner office. If you are happy with your current life, that’s terrific! If that’s not the case, and the only reason for not doing more is because you’re just too comfortable and don’t want to get out of your comfort zone, then it might be time for a change.
- Putting your kids’ college savings ahead of your retirement savings: If your neighbors and friends are sending their kids to college, you may start to feel panic and channel whatever you can toward that 529 account that was neglected until now. Nice gesture, but can you afford to do that? If you are not saving enough for your own retirement (now is a good time to revisit your retirement goals to make sure you are), then that should be your first priority. There is a flip side to this coin, which is…
- Not starting to save for kids’ education if you can afford it: If you can afford to save more, it is time to start putting as much as you can toward your kid’s education if you are planning to pay for college (and now is a good time to have that discussion with your partner!)
- Treating your mortgage — or your 401(k) — like a piggy bank: In the last few months, too many people in our circle have taken a second mortgage on their house to pay for their kid’s college education. Do you want to be paying your mortgage well into your retirement? I don’t think so. Treating your mortgage like a piggy bank for college or any other needs is a bad idea. So is taking money out of a 401(k) to pay for college. Don’t put your retirement in jeopardy by raiding your 401(k). As the saying goes, you can take a loan for college, but there is no loan for retirement.
- Neglecting insurance: Have you re-evaluated your insurance needs recently? Is your life insurance keeping up with your pay and lifestyle? Do you have disability insurance? Have you started thinking about long-term care insurance? If not, now is a good time.
- Not planning for a multi-generational household (if it is applicable to you): Once you reach your 40s, your parents are usually nearing or already in retirement. But these days, more people are finding themselves the primary care giver for their parents while also having kids at home. If you are planning to provide financial or any form of support for them, have you included that in your financial plan?
- Not taking care of self: I understand how, after having kids, life pretty much revolves around them. That’s not a bad thing, but neglecting your needs is bad. Set aside some money for personal hobbies or date night. It is essential to have a life apart from your children. It’s healthy for you and your kids.
It takes meticulous planning, especially in your 40s, to stay strong in the path toward financial independence. The good news is that 40-year-olds have probably learned to be disciplined with their finances — but they can still get off track. And just as it is with any age group, getting back on track requires that you educate yourself on what you need to do and then start doing it!
As I mentioned, we are not in our 40s yet, so this is a list of mistakes that I hope to avoid based on what I see. I might make some completely new mistakes! Only time will tell.
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