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Aging is a double-edged sword. On one side, it seems like each day there’s a wrinkle that wasn’t there the day before, gray hairs begin to crop up like unwanted weeds, and you’re in a constant state of trying to remember how you hurt your back. On the other side, there’s flourishing wisdom from your many experiences and all the good choices you’ve made, as well as the bad.
By the time you reach your 40s, you should be on a stable financial path, having learned budgeting techniques that work for you, realized the frivolity of spending your hard-earned money on a whim, and discovered the importance of saving for your ever-nearing retirement.
In your 40s, you may have built a life in which you’re content and feel like you have it all figured out. Letting your guard down can cause you to make mistakes! Read on to learn some common mistakes people make in their 40s.
1. Not Having an Emergency Fund
Life is unpredictable. You never know when your car will break down, or you’ll have an accident that keeps you out of work. If you don’t have money available when you need it, you could be forced to put the costs of the emergency or even basic needs such as food on a credit card. Worse, the urgent need for money may force you to turn to a payday lender for help, which can sink you deep into debt due to the criminally high-interest rates, sometimes as high as 400%.
By having at least three months’ worth of salary saved (although six is ideal), you should be able to avoid using credit to handle an emergency.
2. Becoming Complacent
By the time most people have entered their 40s, they have a stable career and a home that they plan to stay in for the long haul. When things move along smoothly and steadily for a while, it’s easy to become complacent. It happens at your job, in relationships, and even with your finances. It’s all too easy to become accustomed to the amount of debt you owe, so it’s important to have a handle on how much debt you owe. If you make your payments regularly but only pay the minimum amount due, you’re not moving ahead; you may be moving backward.
Calculate your debt-to-income ratio by adding up all your monthly debt bills, including loans and credit card payments, and divide it by your gross monthly income. Your DTI ratio is used by lenders to determine whether you can handle taking on more debt. According to the Consumer Financial Protection Bureau, a 43% DTI is the highest lenders may be willing to go when considering lending to you. The lower your DTI, the better, not only for acquiring additional credit but also as a way to judge your own financial health. Aim for 25% or lower.
3. Not Having a Plan for Your Money
Between paying off school loans, settling into a career, and obtaining a home, there may not have been much money left over for your retirement. Who wants to think about retirement when just starting a career? The problem is that, when you reach your 40s, you don’t have much time left to build that nest egg.
If you haven’t made much of a dent in your retirement savings, you may want to consider seeking the advice of a financial planner who can determine a course of action to meet your retirement goals.
4. Making Mortgage Payoff a Priority
The thought of paying off your mortgage and owning your own home is enticing, but it’s not always the best idea, depending on what other financial obligations you have. Sure, it would be nice to have that extra money each month. Considering, for most people, that a mortgage is the highest monthly bill, then that extra money would be significant.
Usually, your other lines of credit such as credit cards, car loans, and student loans have higher interest rates than mortgages do. Unlike these debts, the interest you pay on your mortgage is deductible if the principal was $750,000 or less for married filing jointly or $375,000 or less for married filing separately. However, to take advantage of this deduction, you must itemize your deductions, and they must be higher than the standard deduction, which was raised in 2018 to $24,000 for married filing jointly, up from $12,700. Thus, fewer people will itemize.
If you don’t have an emergency fund and still have a lot of higher-interest debt, you should take care of those before concentrating on your mortgage. Credit card rates change while your mortgage rate stays the same, presuming you don’t have an adjustable-rate mortgage.
5. Remodeling to Add Value to Your Home
There’s no guarantee that remodeling your home will increase your selling price. Many people will buy a house and remodel it to their own preferences anyway. If your home is over-customized, it may even decrease the value. You may think that the basement swimming pool is cool, but most homebuyers would probably prefer a normal, dry basement.
6. Prioritizing Your Children’s Education over Your Retirement
Wanting to help your child pay for higher education is understandable. We all want the best for our children. Having a fund set up to save for college is good, but not when it comes at the expense of saving for your retirement. You can take out loans to help your child pay for college; you can’t take out a loan to pay for your retirement.
7. Borrowing from Your 401k
You have all that money in your 401k available to borrow at a low rate, and the interest you pay is put into your account, paid back to you. It sounds like the perfect solution to your money problems, but it can be dangerous. The problem with borrowing from your 401k is that if you lose or leave your job, you’ll have to repay the loan in full immediately. Additionally, the money that you borrow will no longer be earning interest for you until it’s paid back.
Taking money out of your 401k is an even worse idea. You’d receive a 10% penalty, and you’d have to pay income tax if you’re under the age of 59.5.
8. Not Diversifying
The stock market can be a rollercoaster ride, even in good economic times. Instead of putting all your eggs in one basket, your money should be spread into savings, CDs, money market accounts, and stocks that are both low and high risk. A financial advisor can help you determine your best plan of action and the level of risk you should be taking at your age.
9. Assuming Your Income Will Continue to Climb
The truth is that people usually see their income steadily climb through their younger years but peak around age 50. If your income flattens, but the cost of living continues to rise each year (it will), you need to be prepared.
Job security shrinks over time, as your company realizes it can hire a younger person for a much lower salary. Of course, there are laws against age discrimination, but it still happens all too often.
It’s easy to cruise along through your 40s, confident that you’re on a smooth, straight road. However, if you’re not alert and prepared for unexpected turns or bumps, you could find yourself making mistakes that’ll land you in a ditch.