Financial Tips for Fortysomethings

In our previous two pieces, we explored specific actions individuals in their twenties and thirties can implement to build a solid financial foundation.

Now that you are in your forties, however, the stakes are much higher.

Retirement no longer feels so distant, and every back-to-school shopping trip with your children is a reminder that college tuition is one year closer. This decade is crucial for long-term financial planning, though many families exit their forties no better off financially than they entered it, due to the fact that this decade is busy and expensive!

Regardless of how financially savvy you were in your younger years, adhering to this advice will prepare you for success.

Tie up Loose Ends from Previous Decades

Life does not follow a predefined script, and your unique situation may have left you in a position where you are now in your forties, but find yourself slightly behind the curve of what professional financial advisers would consider appropriate.

If so, here is a brief summary from previous articles of action items worth immediate attention.

First, you must pay off non-mortgage debt. Budgets are tight, and your forties are no time to devote precious cash flow to high credit card balances or even student loans.

Risk management is crucial and needs to be squared away at this point. Reach out to a financial planner or someone else you trust to help determine an appropriate amount of life insurance and long-term disability insurance. Determine what your employer offers, and ensure any gap is mitigated with a private policy.

Regardless of your wealth, there are also three basic documents necessary for an estate plan: a will, power of attorney and living will/medical directive.

If you have children, the will is the document where you name the guardian of your minor children in the event of your death. This is not a decision you want to leave in the hands of the court system.

Make Savings Automatic

You are likely finding that time is at a premium these days. If you have children, their activities become your commitment.

Even if you are not a parent, you have likely reached a point in your career where your level of responsibility has never been greater, and requires considerable sacrifice of your personal time, as well.

As a result, your forties can be a time when personal finances are placed on the back burner. The saving grace for folks in this situation is a modern marvel called automatic electronic transfer.

Your biggest goals in the future are retirement and possibly college tuition, and you should have accounts set up specifically for these. Equally important, however, is a systemized, regular contribution plan into these accounts.

To make this strategy last, create a budget detailing your total income, expenses and excess cash flow. Automatically capture surplus savings into these accounts; you will live on what is left over.

Organize and Consolidate

You may have worked for multiple employers during your 15-20 year career thus far. If you have multiple retirement accounts or brokerage accounts cluttering up your life and your mailbox, it can be difficult to keep track of everything effectively.

More importantly, it is almost certain that these accounts are not being invested in an appropriate manner as a whole. Handfuls of mutual funds do not equate to adequate diversification.

Roll all of your old company retirement accounts into an IRA and consolidate all of your brokerage accounts into one, ideally at a single custodian.

Refine Retirement and College Savings Goals

Now that you have a system in place to make ongoing contributions for these monumental goals, how do you know if those contributions are enough, or too much?

These are complicated but vital questions to ask. There won’t be much time in later years to make up for shortfalls at this stage. More importantly, the power of compounding that amplifies any savings from early in your working career will not be nearly as effective on contributions in the future.

Through compounding, a $100 earning 8% annually can grow to $2,172 over a 40-year working career. With only twenty years left, $100 can only grow to $466.

Whether college or retirement, you need to begin by estimating the cost of the goal. From there, determine if your current account balances plus estimated future contributions will grow enough to meet that expense.

Many families who want to be confident they are making the most appropriate decisions enlist the help of a qualified financial planner to help with this complex task.

Pass Your Knowledge to the Next Generation

The most important source of financial guidance for a young adult is his or her parents. How you behave, what you say and what you do not say, will all shape the financial future of not just you, but also your children.

Following the recommendations in this article will show your children that you “walk the walk”–that a focus on financial security is an important value in your family.

To supplement your actions, there are significant life lessons that you can teach a child of any age.

One of the most important is the value of earning a dollar. Whether they do chores for an allowance or have a part-time job, the process of what to do with that money is crucial.

The best technique I have seen involves teaching children to separate money into three buckets: Saving for future, Enjoying now, and Donating to charity.

If a child can appreciate these three important uses for earnings, she will be very well prepared for financial success as an adult.

While you may think that your child would rather watch grass grow than learn about personal finance, there are tools available that make finance fun. An interactive website called the “It’s Your Life Game” is offered through the Schwab brokerage website.

Though it only takes a few minutes, it helps show how life decisions starting in middle school through your late working years all have a significant impact on your financial well being. The link to the tool is: schwabmoneywise.com/kids/activities/game/index.php

Jeff Jones is a certified financial planner and founder of Cypress Financial Planning.