What you need to know
Your financial needs and goals change as you age. By the time you reach your 40s, you should have a stable income and the beginnings of a sound retirement account, but that doesn't mean your finances will be smooth sailing from here on out. This is an important decade as you're moving closer to retirement and probably earning substantially more than in the past. So how do you go about managing finances in your 40s? Here are a few important steps to keep you on the path to success.
1. Save a larger emergency fund.
An emergency fund is an important key to financial stability at any age, but at 40, you should try to build this fund up a bit more. A good emergency fund can ensure you're prepared to pay a sudden medical bill or make up for wages lost to an unexpected illness or injury. Saving about six months' worth of expenses is a good starting point, and you should set aside a bit more if you're the sole earner in your family.
2. Eliminate student loans.
If you are still paying student loans off at this point, it is time to eliminate them. Even if you have a relatively low interest rate, having to pay those loans every month eats up funds you could be investing elsewhere. Calculate how much extra you would have to put towards the loans each month to have them paid off in a year's time, and then dedicate yourself to making those payments.
3. Amp up your retirement savings.
Look over your monthly budget, and see where you can squeeze more money out to add to your retirement accounts. (As mentioned above, if you pay off your student loans, you can then start putting the amount you were paying monthly into retirement.) Are there expenses you can cut back on now that your kids are older? For example, maybe you no longer need to pay for karate lessons and can put those funds towards retirement. The more you save, the better off you'll be 20 years from now when you're ready to retire.
4. Make an estate plan and will.
Meet with a lawyer, and have an official estate plan and will drawn up. This way, should anything happen to you, there will be a plan in place to divide your assets in the way you prefer. This will save your loved ones a lot of time and heartache.
5. Revisit your life insurance plan.
Hopefully, you already have a life insurance policy. If you don't, now is the perfect time to take one out. If you already have life insurance, meet with your insurer to ensure the plan you have still meets your needs. Term insurance is a smart choice for most people. You should have a policy that, at the very least, will pay for your funeral expenses and your beneficiaries' expenses for at least five years after your passing.
6. Look into refinancing your home.
You've probably owned your home for a while now. Keep an eye on mortgage rates, and if you see them coming down, apply for refinancing. This can save you a significant amount of interest over the years. You can put the extra funds into your retirement account or use them to pay for a better life insurance policy.
If you take the steps above, you'll handle finances in your 40s with ease. Retirement is still a few years away, but this is the decade to prepare ahead.
Equal Housing Lender