Are you inching closer to life in your 40s? Here are five financial moves you should make before the next big decade of your life rolls around.
There are tons of major milestones that will happen in your 30s. Your earning potential is high during this time, which makes it easier to tackle the important goals you may not have been ready for in your 20s. Perhaps you're ready to buy a home, start a family, or even open your own business.
As important as these milestones are, they can also add some financial challenges to the mix. Raising a family is expensive, and so are all of those other major goals and investments you want to conquer over the next 10 years.
When you carve out your plans for the next decade, make sure you keep these five financial goals in mind. These moves are important to make before your 40s, and will help prepare you for retirement, which is closer than you think.
1. Pay down your consumer debts
Let's face it. It's easy to get bogged down by high-interest debt when using your credit cards. It happens all the time.
Just take a look at the stats on this type of debt. The average American's credit card balance was $6,194 as of the second quarter of 2019. In total, all credit card debt in the United States added up to $893 billion as of the first quarter of 2020, and Americans were collectively using 23% of their available credit limits during that same time frame.
Considering that the average credit card interest rate in the U.S. was 14.52% as of May 2020, that's a significant amount of high-interest debt for anyone to be saddled with.
If you're still paying off credit card debt in your 40s, it can put a damper on your bank account and your financial goals, like putting money into your 401(k) or paying off your home. If you want to get on the right track, you need to get rid of this type of debt right away.
One of the easiest ways to do that is by using the snowball method. This method focuses on paying off your smallest debts before working your way up to the larger ones. Here's how it works.
- Make a list of your debts and list them from smallest to largest. Ignore the interest rate -- the balance is what matters here.
- When budgeting, put as much as you can toward the smallest debt on the list and then make minimum payments on all your other debts.
- Once your smallest debt is paid off, move on to the next smallest. Do this repeatedly until all of your debt credit card debt is paid in full.
This method is all about modifying your behavior -- and it works. Seeing your debts crossed off the list one by one can be as rewarding as whatever impulse buys you were making with your credit cards in the first place.
2. Focus on your retirement savings
You should be focusing on building up your retirement savings well before you hit your 40s. The general thought process is that when you're in your 20s and 30s, you should be contributing 10% to 15% of your annual income toward your retirement.
The goal is to have about three to six times your salary stockpiled for retirement by the time you hit your 40s. If you can reach that milestone, you should be on track to building the type of retirement accounts you need to actually enjoy retirement.
It can be tough to pull off when you're in your 20s, though. You are just starting out in your career at that point, which means your salary isn't always as hefty as it could be. With less disposable income, you are less likely to prioritize those types of savings. There are other costs to worry about, too, like student loans, buying a home, or paying off other debts.
The good news? If you haven't saved as much as you need and are rapidly approaching your 40s, there's still enough time to play catch-up. You'll need to be dedicated to saving for retirement to pull it off, but it's possible with a few good retirement savings strategies up your sleeve.
3. Build up excellent credit
It can take a long time to build great credit, especially if you have a few blips on your payment record. Before you hit your 40s, you should focus on building up the best credit score possible. The average credit score for people ages 40-49 is 684, which is considered a good credit score.
That 684 score won't get you the best rates on credit cards, loans, or other lending products, though. Try to set your goals higher so you can maximize your score by the time you hit your 40s. A score in the mid- to high-700s will give you access to credit products with low interest rates and higher limits. So do what you can to achieve an above-average score by the time you hit your 40s instead.
About 30% of your score is based on your credit utilization ratio or how much you owe on your credit lines. So if you use the snowball method listed above to pay down your credit cards, the benefits will be two-fold. You'll have more money to stow away for retirement, and you'll have a credit score that shines.
There are other ways to increase your credit score too, like making every payment on time, asking for higher credit limits, and limiting the amount of new credit you take out. All of those tricks should help you build an excellent credit score by the time you hit your 40s.
4. Prepare for the worst-case scenario
Taking out a decent life insurance policy is something you should do before you reach your 40s. The reality is that you won't be around forever, and a life insurance policy can help pick up the financial slack for the people you leave behind.
The loss of your income, the debts you leave behind, or even funeral expenses can cause issues for your loved ones, and those are exactly the types of costs life insurance will help them cover.
It probably won't cost you a lot to nail down a policy, either. You'll pay more for higher coverage amounts, of course, but there are plenty of different policy types and coverage amounts to choose from. It's not just geared toward the wealthy or high earners.
In general, though, most life insurance is relatively inexpensive to purchase when you're in your late 30s because you're still young and (presumably) pretty healthy. The cost of investing in this type of policy will generally rise as you age, though. So make sure you find and invest in the right life insurance policy for your needs before you hit 40. It will keep your family covered in the worst-case scenario.
5. Build that emergency fund
Emergency funds are important at any age, so don't lose focus on building yours just because you have more disposable income to work with. There are plenty of unexpected expenses that can come up in your 40s -- especially if you have kids to take care of.
Keep putting what you can into your emergency fund so that you have the optimal three to six months' worth of living expenses socked away before your 40s. Aim for six months' worth of living expenses if possible to help give you plenty of cushion for large emergencies, whether it's a job loss, a long-term illness, a short-term but costly medical issue, or some other high-cost expense that you need to cover.
Having an emergency fund that's flush with cash will help keep the stress levels down, too. Money troubles and unplanned expenses in particular are a big contributor to high stress levels. So if you have enough money stowed away for a very expensive rainy day, you likely won't have as much to stress about.
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