5 Financial Milestones to Achieve by 40

There are several financial goals 20- and 30-somethings should aim to achieve.

If you're in your 20s or 30s, retirement can seem like it's a long way in the future, so it can be easier and more practical to focus on other financial goals. When you reach your 40s, you're essentially at the halfway point between entering adulthood and reaching retirement age, so it's a good idea to set some objectives you want to achieve by then.

1. Enough retirement savings -- or at least a plan to get there

The traditional rule of thumb from financial advisors is that by the time you reach age 40, you should have three times your salary in retirement savings. So, if you earn $60,000 per year, this means that you should have a total of $180,000 in your 401(k), IRAs, and other retirement-specific accounts. 

This is absolutely a good goal to aim for. However, if you aren't quite there yet, it's important not to get discouraged. After all, when you turn 40, you're likely at least two decades away from retirement, so there's still time to get on track. 

Be sure that you're contributing enough to your employer's retirement account to take full advantage of any matching contributions. Not doing so is literally turning down free money.  And I suggest saving a total of 10% of your salary for retirement -- whether it's all in an employer's plan, in an IRA, or in some combination of the two. And this 10% figure is in addition to any matching contributions you get. 

2. Great credit

You can build good credit fairly quickly, but building truly great credit takes years, which makes it a good 40th birthday goal. 

If you aren't familiar, FICO credit scores range from a low of 300 to a high of 850. The average consumer has a FICO® Score of about 700, and anything in the upper 600s or better is generally considered to be good credit. 

There's no formal definition of great credit, but a score of 760 or higher will typically qualify you for any lender's best interest rates, so that's a good target to aim for. Some of our favorite credit-building strategies can help you get there. 

3. An emergency fund

Experts suggest that you should have at least three to six months' worth of expenses set aside in a readily-accessible emergency fund. And this is certainly a good idea -- if you lose your job or have a major unexpected expense, an emergency fund can prevent financial ruin. 

The problem is that when you're in your 20s and 30s, building such a large emergency fund can seem very intimidating. You don't need to get there right away -- if you can even accumulate $1,000 in an emergency fund, you'll be better prepared for the unexpected than most Americans. Setting aside just $50 or $100 out of each paycheck is a great way to start.

That makes 40 a good age to aim to have a serious emergency fund put away. Saving seemingly small amounts on a regular basis for years can get you there. 

4. College savings accounts for your kids

College was expensive when I went, and that was nearly 20 years ago. Today, the average public four-year university costs $9,410 per year in tuition alone, and that's on top of room, board, books, and other expenses. The average private school costs more than $32,000 per year in tuition. If you have young children, there's no telling how much more expensive it could become by the time you get their first tuition bill.

For that reason, it's a good idea to put time (and tax advantages) on your side by starting a 529 savings plan account. These accounts offer a variety of investment options, and qualified withdrawals will be 100% tax-free, no matter how much investment growth you achieve. Plus, many states offer a nice tax deduction for 529 contributions. 

After you've opened the account, contribute to it regularly. My wife and I have automatic transfers from our checking accounts to our kids' 529 accounts every other week. I can tell you firsthand that you might be surprised at how quickly the accounts can build up. 

To be clear, there are alternative ways to save for college. You can use a Coverdell ESA or even a Roth IRA, to name a couple of examples. The most important thing is that you start as early as possible -- after all, your money will never have as much time to grow as it does right now. 

5. An estate plan

Many Americans think that estate planning is something only wealthy families do. While this is certainly part of the broad field of estate planning, there are some things that all financially responsible adults should do by the time they hit 40.

For one thing, you need a will. If you die intestate (without a will), there are assets like life insurance proceeds and your retirement accounts that can be subject to probate, which means they won't automatically pass to a beneficiary. This is especially true if you aren't married. 

The probate process can be lengthy and expensive, not to mention that there's no guarantee your money and other assets will go where you want them to. If you're a parent, it's also important to put in writing what your wishes are for your children if you (and your spouse, if applicable) die unexpectedly. 

You also need to ensure that if the worst does happen, you have enough life insurance in place. The question of how much life insurance you need is an entire discussion unto itself, but the short answer is that you should maintain enough life insurance so that your family's financial situation doesn't suffer now or in the future. In other words, if I die, I want to know that my kids' college tuition will still be paid and my wife won't have to sell our home for financial reasons, just to name a couple of concerns. 

If you have a high income or a high net worth, estate planning can be far more complicated (and necessary), so I'd advise you to speak with an attorney who specializes in the area. 

In any case, although it's never pleasant to think about your own mortality, a will and a life insurance analysis are must-dos before you reach your 40s.

The bottom line

When you're in your 40s, you're essentially at the halfway point between entering the workforce and reaching retirement age. As you get older and closer to retirement, it gets harder and harder to undo any financial mistakes you've made. 

Therefore, when you reach this critical age, it's important to take a step back and check on your financial progress in these areas, and if you can check all of the boxes I've suggested in this article, you'll be in very good shape going forward.