Financial Planning Tips and Strategies After 40
By the time people have reached 40 years of age most have accrued enough life experience to change how they view money. If they haven’t already done so, at 40 it’s time for people to become deadly serious about making sure their financial house in order. Here are some financial planning tips to help make the most of your money after 40:
Reduce Your Debt and Increase Your Cash
Roy Laux of Synergy Financial Services says the first step in any financial-planning strategy is to create an emergency fund equal to three to six months’ salary. Ronya Corey, financial adviser for Merrill Lynch, says a two-income household might be safe with just three months of saved income, whereas a single person should probably have a six-month reserve. Laux also says people should set aside money for planned expenses, such as if they know they are going to need a new roof.
As the average U.S. household pays approximately $2,000 per year in credit-card interest alone, paying off debt has to be a priority. The goal is to eliminate debt completely so more of your income can be directed into your saving and investments. Corey says that credit-card debt should be addressed first, with the cards with the highest interest rates tackled first. If you have student-loan debt, but the interest isn’t tax deductible, that should also be paid off as quickly as possible. Generally, people should use one-third of their free money to pay down debt, with the rest being put towards savings. To avoid going further into debt, pay cash for everything, whenever possible.
Max Out Your Benefits
Once you hit 40 you should be at least matching every dollar your employer is allowed to deposit into your 401(k). Laux points out that even if the interest is low you will still be doubling your money. Typically, employees in their 40s can contribute up to $18,000, tax-deferred, in 2015, so be sure to inquire with your employer as to what your options are.
Establish Your Own Retirement Plan
In addition to your 401(k), Corey recommends setting up a traditional or Roth IRA, depending on your income, and making the maximum allowable contribution. While a Roth IRA is limited by income, there is no limit for a traditional IRA. The tradeoff is traditional IRAs are tax deferred, paying taxes when the money is withdrawn, where with a Roth taxes are paid before funds are deposited, so withdrawals are tax free. Corey advises not to include Social-Security benefits when planning for retirement, as it may not even be available when the time comes.
Save for College
One of the biggest dilemmas for those in their middle-age years with children is how to pay for college. Advice from financial planning advisers is to begin saving for college as soon as your child is born. However, even in your 40’s there is still time. Start investing in a 529 college-savings plan to reduce the amount you will need to borrow for college. Many state schools offer prepaid tuition plans which allow you to lock in costs as current tuition rates. Laux states families should have a sensible plan as how to reduce college costs, such as choosing a state over a private school or attending community college for the first two years and then transferring to a four-year university. Laux added that if you are over 40 and you haven’t put much money away for retirement it really isn’t the wisest move to pay for all your child’s educational expenses.
Evaluate Your Insurance Needs
Corey believes it’s critical for anyone over 40 to perform an insurance-need analysis as part of their financial planning strategy, as people in this age range frequently have young children and not enough insurance. While insurance is often seen as a burdensome expense, term life insurance is relatively inexpensive compared to the cost of not having it should something happen. Laux adds disability insurance is also a wise investment should the breadwinner become injured.