You would think that by the time people reach their 40s they’d be pretty knowledgeable about their personal finances. And in most cases this is true. By the time you reach 40 you’ll have had enough time to learn about budgeting, how to use credit sensibly and about the importance of saving for retirement. Unfortunately, there are still some financial mistakes you could make even at this time of your life. For example, you may be having a problem figuring out how you’re going to pay for your kids’ education and when and if you will be able to retire. Beyond these issues there are some financial mistakes that you could cost you dearly if you’re not careful.
#1. Not having enough liquidity
You could fall into the clutches of a predatory payday lender if you don’t have enough cash to get you through an emergency. It’s important to have enough cash you’ll never be forced to sell off assets or to go to a high-cost lender. If you feel you don’t have the equivalent of at least three months’ living expenses tucked away in a savings account you may need to make some aggressive moves. This could sting in the short run but will pay off big in the years ahead.
#2. Becoming complacent about your consumer debt
Now that you have a good job and a nice, cozy home it’s easy to get comfortable with your consumer debt. Don’t get complacent about carrying too much. Add up your consumer debt and then calculate your monthly debt-to-income ratio. You might have inadvertently let it creep up to something more than 25%. If this is the case, you need to figure out some ways reduce your debt and make sure you don’t continue to add more. Otherwise, you could ultimately find yourself in a very precarious position.
#3. Not having a plan for your money
You probably took a very serious hit as a result of the Great Recession just at the point when you were working to afford a house and establish a career. And the cost of just maintaining middle-class status has been rising continually. If you’re typical you’re just now recovering from the hit you took as a result of that recession or from even having lost your house or job. This makes it important that you create a plan for your money and stick to it. The problem is that when you’re in your 40s you simply don’t have that many years left to recover.
#4. Making paying off the mortgage your top priority
We know how good it would feel to own your home free and clear and the security this would entail. But it’s usually a bad idea to put paying off your mortgage ahead of your other financial obligations. The financial guru Dave Ramsey recommends that you pay down all of your other debts, set your kids’ college funds in motion and establish your retirement savings before you pay off your house.
#5. Believing that you can add value to your home by remodeling
You may want to turn that 1970s-era bathroom into something new and luxurious but don’t believe that this will add value to your home. The first thing your buyer is likely to do is just rip it out. Never count on any remodeling projects to have the same value to the prospective buyer as they do to you. For that matter, if you over-customize this might actually lower your home’s value.
#6. Prioritizing your kids’ education ahead of saving for retirement
You can feel pressured to put your kids’ education ahead of saving for retirement when you see your friends putting their kids through college. But if your retirement savings aren’t on target then funding your children’s’ education isn’t a good move. They can take out a loan for their education but you can’t take out a loan to fund your retirement. The best way to think of this is as if you were on an airplane and there was an emergency and you put on your kids’ oxygen masks before putting on your own. That doesn’t make sense nor does putting your kids’ college ahead of your retirement.
#7. Taking money out of your retirement savings
One of the most powerful forces in the world is compound interest. When you combine this with time it’s like magic in terms of what it can do for your retirement savings. But when you dip into your savings, even for the best of reasons, you take away someof that time that makes long-term saving so effective. And if you take money out of your 401(k) before you reach 59 1/2 you’ll not only pay a 10% penalty, you’ll have to pay income taxes on the money and at your standard tax rate. Plus, you’ll lose some of that power of time and compounding interest.
#8. Failing to diversify your savings and investments
You may have come out of the Great Recession a little shell-shocked about your investments. This is because at the same time as the housing market crashed so did the stock market. It’s important at this age not to put all of your eggs in one basket – whether it’s a particular investment or your house.
#9. Assuming that your best earning years are still ahead of you
You’ve probably seen your income go up almost every year but it’s a mistake to assume that this will continue. While incomes generally rise for people in their 20s and 30s and maybe somewhat in their 40s, they generally peak at around age 50. You should not only plan for your income to flatten but also be concerned about job security. It’s riskier if you lose your job as you get older. There are laws about discriminating against people because of their age but there can still be issues. You might not be fired outright but you could be “downsized” or your entire department or division could be eliminated.
#10. Believing that being risk adverse is not a good thing
There’s nothing wrong with taking risk when you’re in your 20s or early 30s. But being adverse to risk can be a very good strategy for most people in their 40s. You should have your savings account stocked so you have emergency cash, have a diversified portfolio and keep your debt very low. In other words, control the things you can control, avoid risk, and be conservative and prudent.
The net/net is that it might be easy to start feeling financially complacent now that you’re in your 40s but it would be a mistake to set your finances on cruise control at this point. Watch out for what’s ahead and keep from making the common mistakes you’ve just read that could tank the financial security you’ve worked so hard to create.