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Your 40s are the perfect storm. A bunch of decisions come together all at once and you’ll have to navigate it the best you can. By now you probably have a well-established career. Home remodels and home repairs creep up on you or maybe you’re looking to buy a new home. Your parents are aging and may need financial help. You might have a few young children or maybe some teenagers. Kids are expensive; they take up a good chunk of your resources.
Costs can vary depending on your tastes, your location, and extracurricular activities. In this wicked storm, what you must always consider is whether you are spending your money on what you truly value. Financial planning after all is matching our money with what we value.
What is Financial Planning?
Match Your Assets With Your Values
Finding what you value is super important. I’ll give you an example. For years I’ve been advising a client to save for their own retirement before worrying about paying for their children’s education. In airplanes we learn to put our own oxygen mask on first and then our children’s. Like airplane safety protocols, I was pushing my own paradigm and values on to my client. Recently, we had a very fruitful conversation where the client let me know their values and priorities. Children's education is number one priority and they were willing to work longer if needed to make that happen.
Maybe you value memories with your kids and lots of money on experiences? Do you value Christmas gifts or giving them an experience? Some of you might say, well both silly. Ultimately, we need to have our values lined out crystal clear so we can spend our resources on them in the right order.
Set Clear Financial Goals
Set clear financial goals by defining time horizons and priorities. This is “the right order part”. These could include saving for retirement, funding your children’s education, buying a home, starting a business, or traveling. Having specific goals will give your saving direction and allow you to spend the money on what you truly value. Set goals that are attainable given your current financial situation. Unrealistic goals may lead to frustration and disappointment, making it more difficult to stay motivated. It's important to celebrate milestones along the way to keep yourself motivated.
3 Essential Actions To Accomplish Your Financial Goals
Start Tracking Your Spending
If you’re like me, you hate budgeting. Budgets are comprehensive outlines of what we will spend our money on each month. We can spend a lot of time on budgets and then find out that we don’t follow them.
So, here’s a life hack. What we do instead is tracking. Tracking what we spend money on will help us to change behavior once we know what values we have and what are our top priorities. Like to eat out? Do you value eating out? Those are two different questions. Do you value travel more than eating out? Or do you value paying for their education and spending time doing awesome trips with you? This is where financial planning begins and ends, it all starts with defining your values.
Limit Impulse Spending
Avoid impulsive purchases and instead, practice mindful spending. Before making significant purchases take the time to make sure they match up with your goals and values. A couple of years ago I spent a lot of money on a bow for hunting. This has become my favorite hobby and to me it was worth significant time and thought to find the right bow for me.
When it comes to spending money on things we value, “buy nice or buy twice”. Buying high quality stuff can be more expensive initially but will save us money in the long run. Also, be wary of the things put in the end caps of a shopping aisle. They were put there to entice you to buy them because “they are a good deal” or because you just want them. Watch out for the discount bins too! Make sure to differentiate between essential needs and wants. When you do buy the wants ask yourself the question, "do they match my values?". Have I said that enough?
Eliminate Debt
Nothing will be more financially freeing than paying off credit cards, student loans, and auto loans. Hopefully in your 20’s and 30’s you were able to pay off these debts. Debt never sleeps and it always accrues interest. Debt will be a drag on your financial future unless you take care of it once and for all. The snowball method pays off the highest interest debts first and is the best way to go about it. The avalanche method will pay off the smallest debts first and can be more motivating as you take out each successive debt one piece at a time. Financial planning is a lot more fun once you are paying yourself and not other people.
Investing in the Future
Invest in Experiences
In your 40s, you may want to focus on experiences and activities that will create lasting memories with your loved ones. These can often be more important than having nicer material things. Do you want to experience new cultures, cuisines, and traditions? Paris, Rome, Machu Picchu, Taj Mahal, the Caribbean, Hawaii, the list goes on. When I was 14, I experienced the vistas of Europe coupled with gelato ice cream. Amazing… How about nature adventures like seeing the Redwoods, Everglades, or Yellowstone? Or perhaps you’re like me and value backpacking with your kids and want to hike to beautiful landscapes while testing mental fortitude.
Some people are good at the experience side of planning. In fact, some are so good at it that they forget they must also save for their future. While having tubular experiences with the ones we love is paramount it’s important to weigh the financial impacts of your decisions. If you are behind in your savings goals, you can travel in less expensive ways. Inexpensive activities, like cooking, family game nights, local museum visits, reading together, dancing together, arts, crafts and volunteer work can all build those lasting memories without costing a lot.
Invest in Equity
Equity is a name for ownership. We want to own equity in our homes or other real estate properties. We also want equity in corporations where we want to experience growth in the value of those enterprises. Overtime equities have proven to be great vehicles of growth. Achieving your goals through equity takes time, patience, and discipline. Equities have averaged 7 to 10 percent overtime whereas investing in debt instruments has averaged closer to 3 to 6 percent. It’s advisable to consult a financial advisor who can provide personalized guidance based upon your goals and circumstances.
The common rule of thumb for your 40’s is to have two times your salary saved by 40 and three times by the time you are 45. The 40’s and 50’s are your higher earnings and catchup years. So if you’re feeling discouraged or just getting started; it’s not too late, it’s just harder. You can start financial planning today.
Ultimately you want to buy your freedom in the form of passive income or capital appreciation. Achieving financial independence can happen well before retirement; the sooner you start to save for this goal the easier it is to achieve. I’m always excited to meet 20-year-olds who are opening ROTH IRAs and saving for retirement early. They are well on their way to financial freedom because time is your biggest asset due to compounding returns.
The Balancing Act of Investing
As you become more aware of your values, use them as a guide to making decisions. Consider whether your choices align with your values. If you have a goal of retirement at age 65 but you’re just getting started on saving for retirement, you might have to forego some experiences in your 40’s to accomplish your longer-term goal. That is the balancing act. Because of inflation and its continual effect on currency, most of us will need millions to retire. You read that right, millions. When I was a young boy, millionaires were few and far between. Now they are more common and there are few billionaires.
What are your safety nets?
Emergency Fund
By now you should have an emergency fund with at least 3 to 6 months of expenses set aside. Its ideal to have a year of expenses set aside in your emergency fund in your 40s. During your peak earning years its crucial to have more in the emergency savings as there is more chaos. Medical needs, home repairs, job loss, family needs, and unexpected accidents can and do happen.
Some families can be hit with the perfect storm of multiple needs at once and it’s important to build the emergency fund as you age. I recommend having two years of expenses set aside by the time you retire. Does it all have to be in cash savings? No, but it needs to be in liquid assets with lower variability.
Risk management with insurance
Health insurance is a given and should be part of anyone’s financial plan. Car and home insurance are a must have as well as a cheap umbrella policy. Long term care insurance should be looked at in your 50’s and 60’s. Not having property casualty insurance as well as health insurance is poor risk management. A mistake of not having insurance can derail anyone's financial plan.
Term life insurance lasts for a set timeframe. This is usually 10 to 30 years. Permanent life insurance (whole, variable, universal) is made to last your entire lifetime. In my opinion insurance isn't a great vehicle to save for the future; therefore I recommend using term insurance to cover a specific period in your life when you need it. Paying the home off, replacing income, kids’ college, student loans, and funeral expenses are all considerations when deciding how to much life insurance to buy.
Disability insurance is the most important in my opinion. It’s bad if you die and don’t provide income for your family. It’s worse if you’re still alive and don’t provide income for your family. This puts the family in a tough spot trying to care for you while still paying for the day to day needs. Many companies provide disability insurance through work and it is a definite must. If you’re self employed you’ll need your own policy, it may be expensive but it’s worth it. There are different definitions of disability: own occupation, any occupation, partial, total, and residual. Make sure you understand your policies definition of disability and how benefits work.
Estate Plan and Will
In the event of your death or incapacitation you’ll need your estate documents. A will provides instructions regarding who gets your money and assets and allows you to name a guardian for your children, should you need one. A durable power of attorney gives someone the authorization to make financial or medical decisions for you. A living will states how you want end of life care and if you want to provide anatomical gifts (organ donation) upon your death.
Conclusion
Your 40’s are a busy time with lots of decisions. It’s a good idea to speak with a financial advisor about the topics mentioned in this article. Focus on your immediate and long-term needs. A competent financial advisor can help you navigate the complexities of finances and help you put your goals in the right priorities. The moves you make in your 40’s will have a lasting impact on the rest of your life. I hope you’ve enjoyed this article and found a few things to work on in your journey. Reach out to us and set up a free consultation. Best of luck to you on your journey.
Sean West, Wealth Management Advisor/ CFP®
Disclosure
This blog reflects the personal opinions, viewpoints and analyses of the White Cloud Wealth Management employees providing such comments, and should not be regarded as a description of advisory services provided by White Cloud Wealth Management. The views reflected in the blog are subject to change at any time without notice. Nothing in this material constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security.
Resources:
CFP.ORG: https://www.cfp.net/