Avoid These 6 Common Financial Mistakes in Your 40s
In your 40s, you're starting to enter your peak earning years and likely thinking about your retirement timeline. Now is as good a time as ever to make sure your financial strategy is set up for success.
As you reevaluate your approach, you might uncover some financial mistakes you've been making—but these don't have to impact you forever. Whether you're a diligent saver or still wondering how to save for retirement, you still have plenty of time to avoid these six common missteps and lay the groundwork for the future you want.
1 Not optimizing your income
It's all too common not to ask for a raise in your current role or negotiate for a higher salary when you take a new position. But leaving that potential money on the table can have major impacts on your financial future. Taking advantage of opportunities to earn more not only gives you more money in the short-term—it also increases your ability to save and invest so you money grows more over time.
A typical, modest raise is around 3% to 5% of your income. If you make $70,000 per year and receive just a 3% raise, that's an extra $2,100 annually, or $175 per month. If you invest that amount each month at an annual percentage yield of 6%, you'll have saved almost $80,000 in 20 years. As you continue to see pay increases and boost the amount you save, those numbers only grow larger.
2 Letting old debt hold you back
If you haven't already, use your 40s to stop letting interest-bearing balances hold you back—the longer you've had them, the more interest you've likely racked up. Make a list of all your credit card balances, ordered from the highest interest rate to lowest. From there, focus on paying more money each month to the one with the highest rate, which technically costs you the most money to carry because of the interest rate charges. Work down the list one by one until each is eliminated. As you get your debt under control, you'll have more money to put towards building up your savings and retirement.
3 Putting retirement on the back burner
Many experts recommend having three times your annual salary saved for retirement by age 40. If that number seems impossible, break your retirement contributions into small steps. If your employer offers a 401(k) and matches a portion of your contributions, save at least that amount so you can take advantage of the free money they're offering. Eventually, aim to contribute at least 15% of your household income to retirement, and up to the maximum annual 401(k) contribution amount.
In addition to your workplace retirement plan, you may be eligible to contribute to a traditional or Roth individual retirement account, or IRA. Stay-at-home parents who file taxes jointly may be eligible to contribute to a spousal IRA, even if only one spouse earns income.
4 Not balancing college savings with your future
Saving for your kid's college education is an important goal, but it shouldn't take precedence over your ability to retire. Remember, you can always borrow to pay for college if you must—you may not be able to borrow to fund your retirement.
Run the numbers in a retirement calculator to make sure your own retirement savings accounts are on track. If they are, establish a savings account or a 529 college savings plan to start building an account for future tuition.
5 Not protecting your wealth
Your earning power and net worth may be higher than ever in your 40s if you've been consistently advancing your career over the last two decades. That means it's important to protect yourself, your family and your assets at this time.
Work with a financial advisor to explore whether it makes sense to protect your finances with a living trust or with products like supplemental life and disability insurance. If you've had children or gotten married or divorced over the last few years, confirm that beneficiaries are current on all your financial accounts.
6 Not using a health savings account to your advantage
If you qualify to contribute to a health savings account, or HSA, it can be an advantageous retirement tool. Based on the investments you choose in the HSA, the money you put into the account may grow tax-deferred over time.
If you withdraw funds for qualified medical expenses, you can access them tax-free. After age 65, you can make withdrawals to cover non-medical expenses, but the money will be taxed as income.
Make a positive change
If you've made a few of these financial mistakes along your financial journey, don't stress—there's no time like the present to make a change. Now that you know how to avoid or fix some of these common missteps, you can right your course toward the financial future you want.
A few financial insights for your life
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.