When the big 4-0 rolls around, most people start getting more serious about their finances. Use this list of money milestones to make sure you’re staying on track with your financial goals.
1. Free Yourself Of Bad Debt
By the time you’re 40, you’ll want to be rid of most or all of your bad debt. But what qualifies as bad debt? Essentially, it’s any money owed that doesn’t increase your net worth, like credit card debt and auto loan debt. It’s okay to have some good debt, such as a mortgage or a business loan, which acts as an investment rather than a drain on your finances.
So how can you get out of debt by 40? You’ll need an aggressive payment plan, which means paying more than the minimum owed every month. Say goodbye to any non-essential purchases for a while, then watch how quickly you can pay down your debts without them. The earlier you commit to paying off your debts, the better. Doing so can save you hundreds or even thousands in interest fees.
2. Start Saving Smart
You’ll want to save up a significant chunk of change by the time you’re 40, but only some of it needs to stay in a savings account – the rest can go in your retirement funds or investments. The cash in your savings should be considered an emergency fund. This is a vital savings milestone that can allow you to take some profitable risks while you’re young.
If you’re not sure where to start with your emergency fund, first determine how much you’re spending on the essentials – insurance, groceries, rent/mortgage, etc. Then multiply that number by six and make that your emergency fund goal. If you have six months’ worth of living expenses saved up, you’ll be in much better shape if something major happens, like a layoff, a job opportunity in a new city or even a medical emergency.
3. Prioritize Your Retirement
It’s never too early to start saving for retirement, especially since even small contributions add up over time. By 40, you’ll hopefully have been saving for years already. If you haven’t, then it’s time to get dead serious about making your retirement a priority.
There are dozens of retirement calculators on the web to help you figure out how much to save in your 401K or IRA account. A good starting point, however, is to aim to have at least double your annual salary set aside for retirement by age 40.
4. Bust Out A Budget
A budget may seem like a no-brainer for most adults, but you’d be surprised how many middle-aged folks don’t have a clear grasp of where their money is going every month. Before you hit the big 4-0, take time to record the actual numbers of what you’re spending each month. Account for every dollar, from your regular monthly bills to groceries to fun stuff, like going to the movies.
From there, it’s time to set limits on how much you can spend in each category. When you know how much is in your “fun fund” each month, it’s easier to stop yourself from overspending. Plus, this will help you reach your savings and retirement goals faster.
If you need a little help, use budgeting software and apps, like Quicken, Mint or You Need a Budget (YNAB). Since you can link your online accounts, it’s easy to track spending and keep yourself on budget.
5. Choose Your Home Wisely
When it comes to not living beyond your means, your actual residence is the most importance area where you can aim your focus. For many people, the cost of rent or a mortgage is around 20 to 30 percent of their income, so it’s essential not to overspend in this category. When choosing a place to live, make sure your “must-have” list is realistic. Enough bedrooms to house your family? That’s a must-have. A Jacuzzi tub in the master bath or a deck in the backyard? Those are wants, not needs.
Another factor to consider is buying versus renting. Since mortgage payments build up equity, this is preferable for most 40-year-olds. However, if you move often or can’t afford a home in your area, renting could be the smarter choice.
6. Meet A Financial Planner
In your 20s, your finances are pretty simple. But by the time you reach 40, things are much more complicated, especially when you throw mortgages, business loans, retirement savings, marriage, kids and other things into the mix. If you haven’t seen a financial planner by this point, now is the time. A professional can help you strategize ways to stay on track for retirement and invest your money wisely.
Are you new to the whole financial planner thing? Use these tips to make sure you find someone you can trust:
- Make sure your planner is a Certified Financial Planner, as they should have the CFP designation.
- Choose a planner that charges a flat fee, this way they won’t make commission by steering you towards certain products.
- Ask your family and friends for a recommendation, but avoid hiring an actual family member or friend.
- Ask for references from financial planners you’re considering.
Today, 40 is still young. But that doesn’t mean you don’t need to take your finances seriously. Use the milestones above to gauge your progress and make sure you’re using your money wisely.