Finance Tips

Money Advice for Your 40s

Unique perks and challenges appear when you reach your 40s. On one hand, many people begin to earn their peak earnings in this decade, which is definitely worth celebrating! On the other hand, 40-somethings are also beginning to close in on retirement, which increases the pressure to make strategic money moves. 

If you haven’t found your financial footing by the time you’ve entered your 40s, there’s still time. Here are seven things you can do to set your future self up for success.

Ramp Up Retirement Savings

At this point in your career, you’re likely seeing significant paycheck increases compared to your first few entry-level years. This is great news, but with peak earnings comes peak investment opportunities — make sure you’re making healthy contributions to your retirement fund.

Fidelity recommends that you aim to save 3x your salary by age 40, 4x your salary by age 45 and 6x your salary by age 50. Of course, this advice is calculated based on the assumption that you plan on retiring at 67 and that you started contributing 15% of your annual income by age 25. 

If the above numbers are far from where you’re at now, don’t get discouraged! Start with that 15% contribution and go from there. Revisit your budget to discover areas where you can reduce your spending and increase your savings. 

Pay Down Your Mortgage

After you’ve completed paying off other outstanding debts, such as student loans and credit cards, you should set your eyes on tackling your mortgage. “Most individuals

in their 40s have children who are no longer in day care, and they tend to have a steadily increasing salary,” explained Annette Harris, owner of Harris Financial Coaching. “If either of these are the case, they can start focusing on reducing or eliminating their mortgage payment.”

To pay down your mortgage faster, Harris recommends paying more than your monthly principal payment. Dissect your budget to see where your money is going and where you can redirect more towards your mortgage. Refinancing could also help you lock in a better interest rate and pay off your home sooner, but you may also find yourself repaying closing costs or getting stuck with higher monthly payments. A financial planner can help you decide if a refi is right for you.

Diversify Your Income

While full-time workers with bachelor’s degrees typically make the most money in their 40s and 50s, it’s always best to prepare for the unexpected. In addition to less predictable situations, such as job loss, you may experience a pause or reduction in pay if you become a stay-at-home parent, which can slow down your progress towards your financial plans. 

To keep the cash flowing, consider diversifying your income by taking on a side hustle or making additional investments outside of your retirement funds. Passive streams of income, like rental properties, e-books and online courses, can also provide you with extra security without eating up too much of your spare time. If a worst-case-scenario never occurs and your main source of income never slows, at least your side job will leave you with some extra cash!

Revisit Your Insurance

You should make adjustments to your insurance coverage throughout your life. Many 40-somethings already have health, homeowners (or renters), disability, auto and life insurance. They’ve also likely gone through the process of updating their coverage when they’ve hit milestone moments in their lives, such as getting married or having children. 

In addition to your current coverage, you may also want to consider adding in long-term care insurance. This type of policy can cover in-home assistance and nursing home care for those in situations where additional supervision and attention is needed, like in the event of a chronic illness. Long-term care insurance is more affordable if you get it when you’re younger; many experts recommend shopping for coverage in your mid-40s.

It’s also a good idea to boost your health insurance coverage as you get older. If you have a high-deductible health plan with access to a health savings account (or an HSA), you may want to take advantage of it and set aside additional funds for future healthcare costs.

Enhance Your Estate Plan

You may have already checked “write a will” off your list in your 30s. If you haven’t yet, get started now! Take that future-planning further in your 40s with additional estate plans.

“At the very least, you should have a legally enforced will in place that spells out how your properties will be distributed and how your dependents will be cared for,” explained Lacy Summers, chief marketing officer of Crush the PM Exam. “In the event of your death, it will provide an additional layer of comfort for your loved ones.”

In addition to a will, consider including the following in your estate plan:

Living Will

This dictates your requests if you’re still alive but unable to communicate any medical care instructions. Your living will would include end-of-life care requests, as well as any situations where you would like life-sustaining treatment to be terminated.

Beneficiary Forms 

These would list any designated beneficiaries outside of your will. You should keep these as up-to-date as possible.

Power(s) of Attorney

These list the people you would like to act on your behalf in the event that you’re unable to state your wishes. You can designate one person to handle all of your affairs, or you can choose multiple people to have different powers of attorney. For example, it might make more sense to have your fiscally-savvy sister act as your financial power of attorney while your spouse acts as your health care power of attorney.

Letter of Intent

This letter, left to your executor, gives an overview of your wishes. It’s also where you would list any specific requests you want passed along for your funeral, wake or burial. It’s not legally binding, but it allows you to provide a personal touch and add messages for your loved ones beyond all of the logistic plans.

Have Financial Conversations With Your Kids

As your kids get older, it’s important to talk about both their financial future and your personal finances. Of course, we don’t suggest burdening them with every financial woe you may experience! In addition to teaching them about money throughout their childhood, here are some conversations you should have about your personal finances with your older children:

Mistakes and Successes You’ve Had With Your Money 

When you were your child’s age, did you make an expensive purchase or take on debt that you now regret? Did you earn big bucks from a cool summer job, or did you save every penny for something that was super important to you when you were younger? While we can’t protect kids from making their own mistakes, we can help them learn from our example. Consider sharing with them the money moves you made when you were younger, even if they weren’t always the best.  

How Much You Can Contribute to Higher Education 

“All parents should be open with their children about their financial abilities to pay for school,” advised Ann Martin, director of operations at CreditDonkey. “From the time your children enter high school, you should start encouraging them to look into scholarship programs, earn credit at community colleges, and develop good saving habits to reduce future education costs.”

Encourage your kids to compare the risks and rewards associated with all of their college choices, including different types of schools, majors, and room and board situations. For example, if they have a modest college fund or are planning on entering a less lucrative line of work after they graduate, it may make sense for them to choose more affordable public schools, knock out general education credits at a community college first, or live at home so they aren’t faced with looming student debt later.

Be sure to discuss whether or not you’re able to help with any student loans and what the repayment expectations will be. Remember — if your child fails to make their student loan payments and you were a co-signer, you’ll be expected to pay the debt.

Your Estate Plans and Will 

Discussing our inevitable deaths with our children can be uncomfortable, but it’s important to review the basics just in case something should happen. Of course, this conversation will look incredibly different depending on your assets, your future plans and your child’s age. At the very least, be sure to let your older dependents know which trusted adult is in charge of helping out and caring for them in an emergency, such as an aunt, uncle or godparent. 

If you have particular wishes for your assets, such as a piece of property or a family business, it can be helpful to talk about what your children will inherit openly in order to avoid surprises.

Have Financial Conversations With Your Parents

As you get older, so do your parents. While they may be healthy, independent and enjoying their retirement at the moment, it’s a good idea to start talking about their wishes for the future now. 

“The hardest challenge is communication,” explained Claire Hunsaker, CEO of AskFlossie. “For the aging parent, just having a conversation involves their pride and identity. For the adult child, the worry is an extra stress when family life is already intense. Start talking early, keep the discussion going and be patient.”

Two of the biggest money-related conversations you’ll need to have with your aging parents are their plans for long-term care and their estate. Their openness about these topics may vary greatly depending on their culture, generation and previous family traditions. That’s perfectly okay — having some information now is better than having none when it’s too late. Start by getting an idea of where their important documents are stored, how to contact their executor or attorney, and if they have any funds set aside for in-home care or assisted living.

More Personal Finance Tips

Make smart money decisions before and after your 40s. Check out these decade-specific guides below:

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