When you reach your 40s, most likely your responsibilities have increased significantly. With that in mind, it's more important than ever to figure out how to allocate your hard-earned dollars. To manage day-to-day expenses and accomplish your longer-term financial goals, you'll need a plan you can live with and adjust it to your changing needs.
Here are 10 tips to ensure you're making the most of your money.
- Max out your Retirement Contributions
If your employer sponsors a 401(k), 403(b) or 457(b) retirement plan, it may match your contributions — typical from 2% to 8%. Make sure you're contributing at least the maximum of the match. Most likely, your income has increased; so should your retirement contributions. Saving even 1% more can be significant over the long term. If you earn $50,000 a year, that contribution bump equals less than $42 a month. For example, if you earn 6% annual returns on your investments, that extra 1% could add up to $59,838, assuming 12 pay periods, after 35 years. The goal is to eventually contribute at least 10% to your plan.
- Increase Your Emergency Fund
By now, you've probably realized that when life throws you curveballs, having an emergency fund can help you take care of them and avoid racking up credit card debt. Make sure you set up automatic deposits of at least 10% of your pre-tax income into a high-yield savings account, one that's not connected to your checking account. Your ultimate goal is to have a year's salary in savings. Any time you get a raise, or extra funds, increase your contributions. However, if you're still hauling around debt, take care of it before increasing your emergency fund contributions.
According to a survey from Salary Finance, about a third of Americans run out of money before their next paycheck, even those earning more than $100,000 a year. In your 40s, you may be making more money, but you may be spending more too. If you're in debt, or not saving on a regular basis, it's time to take a look at your expenditures and cut out nonessentials. There are many ways to create a budget to track what you earn, spend and save. For instance, this online budget worksheet from NerdWallet uses the 50/30/20 budgeting method, suggesting that 50% of your income goes toward your needs, 30% toward your wants and 20% toward savings and debt repayment.
- Buy Life Insurance
As you age, you take on more responsibilities. If you have a family, it's vital that you protect them so your assets are protected and their lifestyle can be maintained if something happens to you. If you have children, purchasing a 20-year term life insurance policy is an affordable option to consider. It's less expensive because it has a termination date and doesn't build cash value. So if you're on a budget it makes financial sense. SchoolsFirst Insurance Services offers expertise from our financial advisors. They'll provide comparisons from top-rated insurance companies to help you determine the policy that's right for you and if you already have a policy, review it to see if you have adequate coverage. Visit schoolsfirstfcu.org/insurance to learn more.
- Pay Off Debt
If you're still carrying around debt, develop a strategy to pay it off, particularly debts with higher interest rates. The best way to do this is to revisit your budget and find ways to reduce your spending. If you're carrying balances on several cards, pay off the one with the highest interest rate first and then work on the others or consider consolidating the balances by transferring them to a card with the lowest rate. Once you pay it off, don't go backwards. Use that money to boost your emergency fund. If you need help with debt management, visit GreenPath Financial Wellness for more tips and one-on-one counseling.
- Discuss Your Parents' Retirement and Long-Term Care Plans
As they age, having a discussion with your parents about their future is necessary, especially while they're still healthy and in control of their finances. That way, you can understand their wishes, rather than guessing about what they'd want should they become ill or incapacitated. Your goal is to gather information, including where they store important legal and financial documents, should an emergency arise. In addition to understanding their retirement savings, find out if they have long-term care insurance, because it can pay for expenses not covered by Medicare, including in-home care, assisted living or a nursing home. Usually, the best time to purchase long-term care insurance is by age 65. If they don't have a solid financial plan, urge them to see a financial advisor to create one. And for more information to help them plan for the future, encourage them to check out the National Council's on Aging's Savvy Seniors Financial Education Tools.
- Create an Estate Plan
If you've drafted a simple will, now may be the perfect time to create an estate plan. While a will states how to distribute your assets upon your death, it doesn't help if you become ill or can't make your own financial decisions. A trust, on the other hand, allows your successor trustee — a trusted family member, friend or professional corporate institution named by you — to manage your assets for your beneficiaries in the event of your death or incapacity. In most cases, trusts avoid probate and its associated costs. Since probate is a matter of public record, avoiding it allows your family to maintain privacy. Also, they may be able to settle your trust and distribute trust assets more quickly versus assets subject to probate proceedings under a will.
- Put Retirement First, Then College
If you're a parent, you want the best for your children. However, when it comes to saving for the future, your future takes priority over theirs. After all, there are loans, grants and scholarships for college, but your retirement savings depends on you. Keep in mind that a college education typically lasts four years, but retirement can last 20 years or more. If you have tackled other financial goals such as paying off debt and having a healthy emergency fund, now's the time to increase your retirement contributions. If you can, earmark 15% of your pre-tax dollars to a retirement savings plan.
- Work on Paying off Your Mortgage
Imagine retiring with no mortgage payments. It may sound a bit daunting depending on what you owe, but there are many easy ways to manage it without breaking your budget. If your lender offers this option, one simple way is to set up bi-weekly mortgage payments. Instead of making one payment on the 1st, you split the amount and pay it on the 1st and 15th. This strategy results in making an extra payment a year. By doing so, you can take 3.75 years off a 30-year loan. If you have the funds, you can also make an extra payment every quarter which will take 10.75 years off a 30-year mortgage. Another strategy is making extra payments toward your principle, or your outstanding mortgage balance. If you can get a lower interest rate, you may want to consider refinancing to a loan with a shorter term. Use our Mortgage Payoff Calculator to see how much you can save by increasing your monthly payment.
- Meet with a Financial Advisor
When you're in your 40s, you have more responsibilities and financial goals you're working toward. A financial advisor can review your financial plan and help you adjust it as your circumstances change.