Financial Mistakes to Avoid in your 40's NEW CI Main

Financial Mistakes to Avoid in Your 40s

Not only do people in their twenties face financial hardships, but so do those in their forties. You can still make poor financial decisions even if you have several cars in the driveway, your own home, and a healthy nest egg for retirement.

Here, we take you through some of the biggest financial mistakes you might be making in your 40s, and how to avoid them.

Not having a financial plan

If you are one of the many people who don’t have a retirement plan in place, now is the time to start making preparations. You should have a solid financial plan in place by the time you reach your forties because you are probably only 20 years away from retirement.

Planning your retirement with the assistance of a professional is an investment that can pay off in the form of a comfortable retirement.

Not having liquidity you can access

The standard recommendation is to have three to six months of living expenses stashed away in case of an unexpected event.

Those without an emergency fund may be forced to use their credit cards or their retirement savings to cover unforeseen costs like auto repairs or medical bills, all of which can have detrimental effects on one’s financial situation. Start saving for a rainy day now instead of taking on more debt to get by in a pinch.

Open a savings account at the same financial institution as you maintain your primary checking account. Set up an automated deduction of a set amount from each paycheck, say 3%, and deposit it into a savings account instead. The foundation of a useful savings account can be laid in as little as a year.

Not having enough savings

Don’t give yourself too much credit if you’ve had an emergency fund set up for a while. In their forties, many people suddenly realise that they have a serious shortfall in their emergency reserves due to their increased salary and higher living expenses.

When you enter your forties, it’s important to maximise the growth of your emergency fund while keeping those sums of money liquid, regardless of whether your financial reserves have kept up with your budget or not.

One strategy for doing so is to devote a certain percentage of any unexpected financial windfalls, such as bonuses, to building up a rainy-day fund.

Getting too comfortable with debt

When you have a secure career and a nice place to live, it can be tempting to stop challenging yourself. Be wary of becoming too comfortable with consumer debt, as this can lead to a never-ending cycle of accruing interest and never being able to pay off the original balance. 

Avoid taking on too much debt and don’t use your current financial stability as anbe an excuse to risk it. The fact that a creditor is prepared to let you use their money to buy something unnecessary is no reason to do so.

Paying too much to your mortgage

Understandably some people would rather prioritise paying off their mortgage than meeting their other financial responsibilities. But mortgages can be made more affordable through choices like refinancing when the loan’s length or interest rate is unfavourable.

The money you put towards your mortgage payment could be put to better use elsewhere. After you’ve paid off your mortgage, you can only access the value of your home by selling it or taking a loan against it.

Instead, you might utilise the money you have lying around to get caught up on your retirement savings, fund your child’s college fund, or pay off any other debts you have.

Wasting money on remodelling your home

The deluxe bathroom renovation you believe adds a small piece of heaven to your modest cottage-style house may be the very thing a buyer will want to pull out and redo, proving once again that ‘one man’s trash is another man’s treasure’.

Over-customization might reduce your home’s worth, so don’t assume that other people will place the same importance on your modifications as you do. Instead, prioritise the return on investment while making changes to your property.

Minor renovations to the kitchen or bathroom, sprucing up the lawn, revamping the entrance and turning the attic into a bedroom round out the top five things you can do to affordably invest in your home’s resell value.

Using your retirement funds to pay for college 

There’s a lot of peer pressure to do the same when everyone around you is sending their kids to university.  It has been found that parents are more inclined to take money out of their retirement accounts to pay for college tuition. But paying for your children’s college education is a bad idea if you’re not saving enough for retirement.

Your children can get a loan to help pay for college, but you won’t be able to get one to help you out in your golden years. You wouldn’t help the kids before you helped yourself in an aeroplane emergency, therefore the same logic applies here. Otherwise, you run the risk of having a difficult time in retirement.

Not having a diversified portfolio

If you have a disproportionate amount of your portfolio in one investment category, any losses will be more severe.

Investing money in a variety of different ways reduces the danger of putting all of one’s eggs in one basket. Even if you choose to diversify and still encounter losses, you still have time to recover if you are in your forties.

Diversify your portfolio by investing in different types of assets and different parts of the world.

Frequently Asked Questions

Though it may still seem like a long time away, your retirement may happen 20 years from now. Financial planning in your 40s will help you prepare for a financially sound retirement.

Having liquidity you can access in your 40s will prevent you from dipping into your retirement account or children’s college fund in case of emergency.

You should avoid unmanageable debt in your 40s, particularly if you end up in a situation where you are only paying off interest and not the actual loan.

Not necessarily. Home remodelling projects can cost a lot of money without necessarily improving the resale value of your house, as tastes differ. Rather invest in the structural integrity and standard of your house.

You should invest in a diversified portfolio in your 40s. A unit trust, such as that available from Momentum on the EASYInvest platform, allows you to put your money into a variety of different stocks.

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