You may feel like you graduated from college just yesterday, but by the time you reach your 40s, you’re officially in middle-age. In fact, ages 40 to 59 are the only years when you’re not considered to be either a young adult or a senior adult — you’re just an adult. And as such, this can be a pivotal (and exciting!) time in your financial journey. Not only are you likely earning more than you ever have before, you’re also getting closer to retirement.
For most people, it’s also a wildly busy era where you’re trying to reach the peak of your career and raise your kiddos to get ready to tackle the world independently. If it feels like a lot, that’s because it is! So, take a deep breath, and allow these expert-driven budgeting tips to guide your strategy:
Budgeting In Your 40s
Now is the time to prioritize retirement if you haven’t already. Hopefully, you’ve been contributing to your 401(k) and/or an IRA since your early 20s. If you have, then you should be meeting these baselines:
- In your 40s you should have two to three times your income saved
- In your 50s you should have four to five times your income saved
“If you are comfortable with where your 401(k) is, then you can also consider putting some portion of your savings toward generating passive income for your future,” says Snigdha Kumar, a personal finance expert and head of product operations at Digit who offered the previous baselines. “Buying something like a rental property might be a good idea to ensure you have diversified channels of getting future income.”
If you are pretty far off from these figures, don’t lose hope, Kumar says. It is never too late to contribute to a 401(k) or IRA, she notes, but try your best to put as much toward it as you can afford so you have a few years to allow compound interest to do its thing. “You can also take up side gigs and consulting to save extra to put toward your retirement,” she adds.
Budget for life insurance
In your 40s, there’s no reason why you can’t run a marathon, hike to the top of Machu Picchu or walk the Camino in Spain. However, the more laps around the sun you take, the more critical it is to consider life insurance. Not so much for you, but for the people who will miss you, says Monique White, a financial coach and the head of community at Self Financial.
“Unfortunately, your financial decisions can affect your loved ones when you pass away. It’s important to allow your family and friends the luxury of coping with their loss without the financial stress,” she says.
According to a study through The National Funeral Directors Association in 2021, the average funeral with a viewing cost $7,848. The average funeral with cremation was $6,970. “Depending on your employment, you may be eligible for life insurance through your employer. If not, you can talk to a licensed life insurance agent about your options,” White notes. “Additional policies can be added if you want to leave more for your family.”
Pay off high-interest debt
Sadly, many people are still chipping away at high-interest debt — like student loans and credit cards — well into their 40s. If you fall into this category, it’s important to do all you can to get through it ASAP. “Reducing debt payments can increase your discretionary income,” White says. “An increase in discretionary income means contributing more toward retirement.”
There are different approaches, and a reputable financial advisor can help you determine what makes the most sense with your current income, lifestyle and debt picture. This could be the avalanche method, which means making the minimum monthly payment on your consumer debt and paying extra on the account with the highest interest rate. Or another option is finding a consolidation organization that will help you reduce your interest rates and monthly payments, White says.
“Be cautious of companies that tell you to stop making your payments,” she continues. “A good debt consolidation organization will work with your credit card companies. There is a peace that comes with being debt free — or at least working toward it — that you deserve in your forties.”
Get rid of your spending ruts
Likely, by the time you hit your 40s, you’ve become accustomed to budgeting your finances, and you know what is working and what is not, says Dr. Elizabeth Dunn, the chief science officer at Happy Money. “But you might also have fallen into some ‘spending ruts,’ continuing to buy things that no longer really give you joy.”
This might be something like a subscription that you don’t actually use. Going on a vacation to a hotel that was dazzling 10 years ago but now has really taken a hit. Maybe it’s a fancy latte you get because it’s a ritual, but honestly, it upsets your tummy more than you admit.
“Try taking a break from your spending ruts for a few weeks,” she says. “If you miss it by the end of this period, then permit yourself to start buying it again. The break you took should enable you to experience renewed pleasure from this purchase. And if you don’t miss it? Then this is a great way to cut back on spending.”
Accelerate college savings
If you’re a parent, your kids likely take up most of your day, energy and finances. During your 40s, it’s important to accelerate college savings because, like it or not, they’ll be packing up their room and heading out before you know it, says Kelley Holland, an author and financial coach for women.
“The sooner you put money in a 529 account, the more time it will have to grow,” she says. “You will easily stick to a college savings plan if you automate your contributions. Just set up an electronic transfer every month from your checking account into the 529.”
If you have already been doing that, consider adding a bit more each month if you can afford it.
Budgeting In Your 50s
Retirement isn’t just a lofty dream for ‘one day,’ it’s now 15 to 20 years away. As you get closer, you’ll need to make your upcoming ‘golden years’ your biggest financial priority. This means investing to the tip-top of your budget without going into debt. After all, the more you stow away, the better off you will be when you finally say buh-bye to that 8 to 5.
Check-in on your full financial plan
As you get close to retirement, you should have a full financial plan up and running, says Kendall Clayborne, a certified financial planner at SoFi. If you don’t, it’s time to get one that includes everything from mortgage payments to potential healthcare costs and beyond. “By having a full financial plan run, you have the opportunity to see if you are on track and if you need to make any or if changes before taking any irreversible steps such as leaving the workforce permanently,” she says. “It can also help you make informed decisions about other elements of retirement, like when to start taking social security.”
Take control of your spending habits
If this advice sounds familiar, you’re not losing your mind. Because spending habits change over the years and they are easy to lose control of, it’s always important to pull in the reins. And especially when retirement is in sight. As White says, it’s time to get to know your budget more closely by tracking your essential expenses and discretionary spending. “Ask yourself what your wants vs needs are,” she continues. “Use a retirement calculator to estimate how much you will receive each month (Social Security and/or pension), then figure out how much you will need each month to maintain your lifestyle.”
Max out your retirement contributions
“Coming out of a pandemic, paired with inflation, makes many Americans weary about their future,” White says. “Either you feel like you’re not saving enough, or you may have pushed your retirement date further than you hoped.”
However, whether you’re on track or trying to catch up, knowing how much you can contribute into your retirement accounts is crucial for arranging your departure from the workforce. In other words, keep maxing out your retirement contributions.
Also, try to take advantage of new opportunities: the IRS announced that you can now put an extra $2,000 into 401(k) plans. “That makes the 2023 contribution limit for 401(k), 403(b), and the federal government’s Thrift Savings Plan $22,500,” White says. “The IRA catch-up contribution limit for employees age 50 and older is $7,500.”
Consider downsizing your home (and mortgage)
In addition to saving, your fifties can be a good time to reassess your living expenses and living arrangements, Holland says. Maybe your kids have left for college or will in the next few years. Do you still need your large home? Or could you sell, turn a profit, and buy something smaller and less expensive? The more you can save, the more you can put toward retirement or even travel in your golden years. “You may also find that downsizing helps you reduce the amount of time you spend on household chores. To quote the old commercial, that’s priceless,” Holland adds.
Longevity’s impact on healthcare costs
While no one wants to think about potential illness, aging is a reality. And since people live longer than before, it’s vital to prepare for your lifespan and healthcare costs. This can run thousands of dollars, and having a nest egg will help take the burden off your retirement plans and your children.
Pham says another major consideration is that you may also be a part of the ‘sandwich generation,’ which refers to adults caring for elderly parents and their own children. “Consult with your aging loved ones and your advisors to discuss the best way to plan,” she adds.
- This Account Can Help Women Save Their Retirement
- The Ultimate Retirement Planning Checklist
- HerMoney Podcast: Financial Planners, Retirement Specialists, And HSAs For Long-Term Care
SUBSCRIBE: Boost your bottom line and own your future. Subscribe to HerMoney today for free!