I’d like to thank Phillip Christenson, CFA for today’s post about Smart Money Moves in your 40’s. Phillip is a Chartered Financial Analyst and financial advisor for Phillip James Financial, located in Plymouth Minnesota.

If you’re in that area, you reach out to Phillip for further financial tips and help!


Turning 40? Four Financial Moves to do Now

Ahh, to be young again, straight out of school and beginning your career, your whole adult life lies ahead of you. That…was so long ago.

You are no longer young, nor are you in the beginning stages of a career anymore. While it’s generally assumed that you have a fairly reasonable salary by your fortieth birthday, this isn’t necessarily the case.

That doesn’t always matter – regardless of what you make. There are still steps you can take to ensure your financial future and tuck away a decent amount of money each year.

Some people making $100,000 a year are drowning in debt. The person next door making $30,000 a year might be living frugally and managing their finances like a pro. How you manage your money matters a whole lot more than what you make.

If you haven’t done so already, these following four steps will help you secure your financial future. They’ll also allow you to maximize the available opportunities you have, to ensure that you can still retire comfortably in twenty-odd years. See: Is Gen X Prepared for Retirement?


1. Make a Budget

Plan your retirement BEFORE it's too late!

Planning your finances involves a lot of moving parts, each delicate!

If you haven’t done so already, begin thoroughly tracking everything you purchase, no matter how seemingly inconsequential it is. This is especially true if you are not earning above the median income in your area – the cost of living and the median income often correlate closely.

It’s impossible to plan for your future if you only live in the moment. At the beginning of the next month, start keeping track of all of your after-tax income as well as each and every expense you have. Many people are surprised at how much each little frivolous purchase adds up over time.

I’ll give you a personal example to illustrate this. I used to get sushi once a week at a local restaurant. This was one of my completely discretionary expenses.

I don’t drink much, I don’t smoke, I don’t buy electronics or anything else habitually. It costs about 30 dollars after tip and tax.

While I figured I could afford it, it came out to about 4 times a month, 48 times a year. 48 x 30 is $1,440!

I stopped going out to sushi so regularly and found that I was able to put away more money each month. There might be a lot of these little expenses in your life. Coffee is most people’s addiction.

Just cutting down on this or a few other expenses each month does wonders for your cash flow and your bank account. Considering that about half of Americans have less than 1,000 dollars saved, just saving $100 a month puts you well ahead of the curve.


2. Start Thinking about your Retirement Lifestyle

By the age of 40, you probably don’t own your house outright just yet. 30 year mortgages are designed to last much of your adult lifetime, even if you make multiple payments in a month.

If you haven’t bought a house yet, then you’ll have rent costs to contend with. In either instance, your living arrangements closely tie in with other large lifestyle expenses you may have – utility bills, internet bills, HOA fees, property taxes, and so forth.

This is to say nothing of any additional expenses that are only indirectly related, such as how much you pay in gas to drive to and from work. This information combined with your budget will help you determine your current lifestyle.

From there you can figure out what it would take to maintain that lifestyle or whether you will be forced to decrease it or have the means to increase it during retirement.

Next, you have to look at how much you are saving and how much (if any) income you will have after you retire. This can include Social Security, investments, bonds and the like.

Will your savings and retirement income be enough to cover all your lifestyle expenses? If not, you need to increase your savings now or you will need to make some difficult choices about what you can afford to live like by the time you retire.


3. Maximize your 401(k)

Your 401(k) is one of the most powerful tools you have. If employers agree to match a portion of what you’ve put in, that’s literally free money for you.

Your 401(k) is tax-deferred until you withdraw from it. This means that you don’t have to pay a dime in taxes until you actually take out your funds.

Your 401(k) can consist of a wide array of investments. Usually they’re in the form of mutual funds – bonds funds, money market funds, US stocks, international stocks, small cap stocks, etc. The employer match is usually up to a certain percentage of your annual pay, 5% is typical.

Because these investments often see compounding returns, your 401(k) can generate some serious cash for you after a long period of time. If nothing else, you get to take advantage of the tax opportunities your 401(k) can offer you.

401k contributions lower your taxable income. This means you might be able to qualify for other tax credits and deductions that can help you save on your end-of-year tax bills.

This goes for 403(b) and 457 plans as well. They are all great retirement vehicles.


4. Consider Life Insurance before it’s too late

Congratulations on making this far in your life without using your life insurance. The longer you live, the less insurance you will probably need.

Many of your expenses go away later in life. The kids finish college, the mortgage gets paid off. There are less years that you need to protect if something were to happen.

So now is a good time to reevaluate your needs. The longer you wait, the more expensive it becomes.

Consider how much your family would really need if you were no longer around. This also goes back to your budget. If you know your spending it’s easier to determine how much life insurance your family would need to maintain their current lifestyle.

At a minimum, I would suggest enough insurance to pay off all your remaining debts and make sure your children are able to finish their schooling. Another suggestion is to stick with less expensive term insurance and try to match the term (length in years) of the policy to after most of your debts and goals are completed.


Being 40 is a great time to prepare financially

Some people say life begins at 40! Get your financial life started off right by completing these 4 smart money moves as early as possible.

Your 50-year-old self with thank you if you’re well prepared. If you need help with any of these planning items, make sure you reach out to a fee-only financial advisor like my friend Greg Phelps today!