Our Thoughts

Top 6 Financial Mistakes People in Their Forties Make

 

You may not realize it, but your 40s may be the most important decade of your life — financially speaking. There’s a general assumption that by this time you’re more secure in your career and likely have more bills (and also more responsibilities) than you did in your 30s.

This could include a bigger mortgage, newer cars, and a well-funded 401(k) plan. Because this decade is so crucial to your future retirement, many people make the mistake of either saving too little or not being smart about where they put their earnings.

If you’re looking to up your financial game, here are five common mistakes you’ll want to avoid.

1. Not adjusting your savings to meet your growing income

Sure, your 30s may have helped set the groundwork for financial success, but your 40s is where you really come into your own. Unfortunately, instead of adjusting your savings habits to meet your growing needs, most tend to stick with the budget plans they made when they were still fresh-faced and young.

Take a quick look at your finances and see where you were 10 years ago vs where you are today: If you were putting 10% of your monthly income into your 401(k) or other savings account, see if you can put 15%. You’re probably paying more bills today than you were 10 or 20 years ago, but you’re likely making more, too.

2. Agreeing to a mortgage that’s too high

Tired of slumming it in small apartments and tiny lofts, most people in their 40s will likely start looking for homes that offer a little more “leg room”. While it’s important that you live in a safe neighborhood, have enough space for your growing family, and live in a decent school district, it’s also worth considering how (and often where) you’ll come up with the funds to help pay your increased rent.

When it comes to upgrading your mortgage, it’s also worth considering how the increased budget may affect your potential retirement savings: If you’re going to have to dip into your retirement to make ends meet, then you may want to think twice before buying a bigger house.

Remember, a mortgage is something that’s supposed to be manageable, not some behemoth that threatens to consume your life savings.

3. Not having a backup plan

One of the biggest mistakes people make in the 40s (or any age, really) is not planning for emergencies. We hate to break it you, but you’re no longer in your 20s, and it’s worth taking the time to come up with a plan A, B, and C.

Experts say the single most important insurance you need in your 40s is disability, and we wholeheartedly agree. Back injuries, knee problems, health issues — these are all common factors of life, but if you plan accordingly you won’t have to worry about them affecting your finances.

Some companies offer their own disability insurance packages, but it’s worth doing a little research and checking what else is out there.

4. Saving for college instead of saving for retirement

This is an extremely common mistake, and though it’s often done with good intentions, the repercussions can be extreme. While it’s smart to start saving for your children’s college education early, it’s important not to do so at the expense of your own retirement savings.

Instead of cutting into your retirement savings, look to cut costs in other ways. Try to be more frugal at home, cut down on eating out, and making a tight budget that the whole family can stick to. Think of it this way: You can always apply for student loans, but you can’t get a loan for your retirement

5. Not taking advantage of your 401(k)

Another common mistake is not taking advantage of your 401(k), or worse, cashing it out too early. Sure, accidents happen and it helps to have an emergency fund on call, but once you cash out your 401(k), the potential interest you would’ve earned is gone forever.  

According to a recent Bloomberg study, 401(k) accounts grew an average of 9% from 2016 to 2017, but more than 20% of employees aren’t contributing enough to meet their employer’s benefits.

If you’re still contributing the same amount to your 401(k), look to raise the stakes by putting a little more in each month.

6.  Focusing solely on your 401(k) plan

We coach clients to build both an emergency reserve fund (this could be part of #3 above but wasn’t addressed) and an after-tax investment account. Dedicating savings to tax-deferred accounts is important, but those accounts are largely limited to distributions after age 59 ½. Further, getting to retirement with an abundance of tax-deferred assets restricts a retirees ability to proactively manage taxes during retirement. Remember, just like market diversification, tax diversification is important too.

Want to learn more? Reach out to FJY Financial today!