In our 30s, we are generally pre-occupied with the big three events:
- Children, and
When you reach your 40s, the focus shifts to creating financial freedom. You are expected to make sound financial decisions and be right on track to achieve your goals. However, this is not always the case.
Any major financial mistakes made in your 40s will generally be larger, with longer repercussions,than mistakes made at a younger age. This is because you now have more financial obligations to meet, including raising your family, paying off a mortgage, setting yourself up financially for the future, and potentially running a business. In your 40s, it is more difficult to recover from financial mistakes, plus it can have serious implications on your retirement.
Having said that, I have come up with the biggest money mistakes to avoid in your 40s.
- Lifestyle expenses getting out of control. Stepping into your 40s is usually accompanied by a more complicated lifestyle. Keeping an eye on the present, while still planning for the future, suddenly becomes a challenge. This is the time when most people reach the peak of their careers. Hence, this is also the time when you get bigger pay cheques, which can bring a lot of good things like a new house, luxury cars, lavish vacations, and shopping sprees. Don’t be a victim of the instant gratification trap,and don’t let expenses grow until they are spiraling out of control.
TIP: Keep your spending in check
- Supersizing your house or over-capitalising on renovations.When you reach your 40s, you may feel like you have outgrown the home that previously provided more than enough space. Resist the urge to move to a bigger place or make expensive renovations, especially to your bathroom or kitchen, unless you are in a very strong financial position. Don’t count on others to value renovations the same way you do. In fact, the expensive renovations you feel adds more value to your home may be exactly the thing a prospective buyer will want to re-do.
Most renovations don’t increase the value of a house as much as you’d think. Over-customisation can even lower the value of your home. Bigger houses also mean bigger mortgages, higher electricity bills, higher maintenance costs, and higher property taxes. More importantly, maintaining a large house often means sacrificing on education, travel,and retirement savings.As a financial planner I’ve noticed that my clients who are best prepared for retirement are those who own modest homes relative to their incomes.
TIP: Get on top of your mortgage and don’t over-capitalise
- Not taking good care of your health. People in their 40s tend to get so busy with work and their children, that they neglect their health. Sooner or later this will become a big problem because medical expenses increase exponentially with age. The lesson here is to invest in your health and minimize future medical expenses by eating a balanced diet and exercising regularly.
TIP: Invest in preventative health
- Allowing your emergency fund reserves to fall behind your growing expenses. Having an emergency fund is essential for providing a cash buffer to deal with unexpected events and expenses. Once you reach your 40s, adjust your emergency cash reserves proportionally as your income and expenses grow. It is also advisable to invest these emergency funds in a conservative savings account that can be readily accessed, should the need arise.
TIP: Always have a cash buffer for emergencies
- Prioritising your children’s education over your retirement savings. Being able to send your children to private school is great because it will give them a head start in life. However, don’t do it at the expense ofyour future.Your health and your retirement should be your priority. Not setting aside enough for your retirement now will make it more difficult to catch up in the long run. Don’t worry, public school is not the end of the world – I am the product of a public-school education so I may be biased. Public schools regularly outperform private schools in academic rankings, however I do recognise there are other benefits of attending private schools, such as building strong networks.
TIP: Don’t sacrifice your retirement to fund your children’s private school education
There is a flip side to this…
- Not starting to save for your children’s education. The cost of funding a child’s education increases every year. This ‘education inflation’ is not just limited to private schools; public schools now offer more extracurricular activities (which is great), however they come at a cost. Understandably, you want the best for your children, and don’t want them to miss out. Money provides options and opportunity. Regular, automated savings are a great way to put aside money to fund educational expenses without impacting on your lifestyle.
TIP: Start an automated education savings fund
- Neglecting your personal insurance. You and your ability to earn an income is your family’s greatest asset. Have you re-assessed your insurance needs recently? Do you have disability insurance? Do you have critical illness insurance? Is your life insurance keeping up with your income and lifestyle?
If not, now is the perfect time to act and address your insurance needs.
TIP: Seek expert advice on your personal insurance needs
- Treating your mortgage like an ATM. You don’t want to be paying your mortgage well into retirement. Treating your mortgage offset account or redraw facility like an ATM is a bad idea. Spending the equity in your home just to pay for an overseas holiday or buy a brand-new car isn’t the smartest idea.
Your 40’s are generally tour peak earning years, however it’s easy to spend this additional income on discretionary items unless you have a structured and automated mortgage repayment plan in place.
TIP: Don’t use your home equity to fund holidays or new cars
- Investing too aggressively or too conservatively. You must make smart investment decisions if you want to build the income stream needed to achieve your dream retirement. At this point you have over 20 years until retirement, and more than 25 years IN retirement, so be careful holding your wealth in only cash or term deposits. It is important to know the asset allocation that suits you best. For a 40-something, it generally involves a good portion of your portfolio invested in growth assets such as shares and property.On the other hand, don’t go for high risk investments without seeking the appropriate advice beforehand. The idea is to keep it simple, diversify your investments, and don’t take more risk than you need to.Make your investment choices based on your own comfort level with risk, something that a financial adviser can help you evaluate.
- Thinking that it’s too late to start saving for retirement. The best time to start saving for retirement was yesterday, and the second-best time is today. You won’t hear anyone say it’s too late, although the ideal scenario is to start early soyour investment has more time to grow. If you haven’t started yet, the most important thing to do is to actnow!Start putting money away for retirement, even if you are a little late and only have a small amount in your superannuation account.
TIP: The best time to start saving was yesterday, the second-best time is today!
- Being complacent in your career. In your 20s and 30s, you can be very aggressive about better job prospects, pay rises, and going after promotions. But in your 40s, you can become complacent; and this can lead to a perception that you don’t want to advance your career. These days there are many ways to schedule work hours and come up with the ideal work/life balance.A bigger job with more responsibility may not mean less time with the family.If the main reason for not striving to do more is that you don’t want to get out of your comfort zone, then it is time to reconsider and implement some changes.
TIP: never stop progressing professionally
- Complex, non-transparent investment schemes. If you don’t understand exactly where your money is invested, and it’s hard to withdraw your money from the investment – BEWARE! By chasing high returns via complex investment schemes from questionable sources such as property spruikers/educators or developers you are putting your hard-earned money at risk and you could possible lose it all.
TIP: if you can’t understand it, don’t invest in it
It takes careful and diligent planning, particularly in your 40s, to stay focused on the path toward achieving financial freedom. The good news is that 40-year-olds have most likely learned to be smart and disciplined with their finances, although some occasionally get off track. But just like any age group, correcting mistakes and getting back on track requires educating yourself on what needs to be done and, most importantly, starting to do it.
My final and most important tip is to avoid financial induced stress and anxiety. I see this far too often, and it detrimental to your relationships and health. You need to get your financial house in order, and keep it that way year in year out. The best way to do this is to find a team of professionals to act as your financial Sherpas, helping you navigate your way to the top of your financial Mt Everest.
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At Assure Wealth we specialise in helping busy, successful families structure their finances to achieve greater wealth and financial peace of mind.
Disclaimer: The information provided on this website has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your Walker Lane Pty Ltd Adviser before you make any decision regarding any products mentioned in this communication. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Walker Lane nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.
Assure Wealth Pty Ltd ABN 31 965 466 780 Corporate Authorised Representative no. 1244817, Patrick Casey Sub-Authorised Representative no. 1244748 of Walker Lane Pty Ltd ABN 70 626 199 826, an AFSL holder No 509305.