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Reaching the milestone of 40 years old is an ideal moment to reflect on your life journey, including the achievements you’ve made and the relationships you’ve nurtured. However, for many, especially those who haven’t managed their finances well, this can trigger feelings of anxiety.
Turning 40 often highlights the urgency to correct past financial missteps. It’s essential to take charge of your finances to ensure a stress-free retirement. Here are five crucial financial moves to consider before hitting the big 4-0.
1. Deal with Consumer Debt
According to Ryan Inman, a financial planner for doctors, addressing consumer debt is vital before you turn 40. High-interest credit card debt, with average rates exceeding 17%, can be particularly burdensome.
To tackle debt effectively, consider various strategies. You might opt for the traditional method of paying as much as possible each month, or explore techniques like debt snowball or debt avalanche methods. Another option is to apply for a balance transfer credit card offering 0% APR for up to 21 months.
Aim to eliminate all consumer debt, except for your mortgage, to enhance your ability to save for retirement and catch up on investments.
2. Maximize Your Retirement Savings
As you approach your 40s, the importance of maximizing retirement savings becomes clear. Financial planner Benjamin Brandt, host of Retirement Starts Today Radio, encourages individuals nearing 40 to contribute the maximum to their retirement accounts.
Contributions are made from pre-tax income, making it less burdensome than it appears. Additionally, maximizing contributions can lower your taxable income, potentially reducing your tax bill.
If you can’t contribute the maximum, aim to increase your contributions gradually. Ensure you’re taking full advantage of any employer match, which is essentially free money toward your retirement savings.
3. Automate Your Finances
Riley Adams, a Certified Public Accountant, suggests that your 40s are an excellent time to automate your finances. Automation minimizes unnecessary spending and helps prevent lifestyle inflation as your income increases.
Consider setting up automatic transfers to a high-yield savings account or brokerage account. Automating your retirement contributions also ensures consistent savings without the hassle of manual transfers. (See also: 5 Ways to Automate Your Finances)
4. Purchase Insurance Based on Future Finances
By the time you reach 40, it’s crucial to assess your insurance needs with an eye toward the future. Financial planner Brenton Harrison advises against basing your insurance on current income alone, as your 40s may represent peak earning years.
Consider where you envision your career and finances in the next decade, and purchase insurance accordingly. This might include not just the basics like homeowner’s and auto insurance, but also an umbrella policy for extended coverage.
Additionally, ensure you have adequate life insurance, especially if you have or plan to start a family. Securing coverage while you’re still healthy can lead to more affordable rates.
5. Build an Emergency Fund
If you’ve faced financial challenges in the past, it may be due to a lack of an emergency fund. Experts recommend saving three to six months’ worth of expenses to prepare for unexpected events.
Even if you can’t save that much right away, starting with a smaller amount is better than nothing. Place your savings in an interest-bearing account and continue to contribute regularly until you reach your goal.
