If our 30s are all about the 3Ms — Marriage, Mortgage and Midgets — then our 40s are all about creating our financial freedom.
In our 40s we’re no longer cool, especially to our kids. Most of the parties we now go to are for 8-year-olds. Designer reading glasses are suddenly a fashion statement.
So put them on and read this guide to what we need to watch out for.
1. Forever young
By our 40s those first few grey hairs are a reminder that we won’t be young forever. We all know friends or family members who have had serious health or financial scares. So plan for big unexpected events because we know they can happen.
There is no excuse for not having a written financial plan. Whether it’s 15 pages typed or one page in an exercise book, your financial road map will move your family confidently towards financial security.
At a minimum it should cover financial goals, budgeting and cashflow, insurance protection, superannuation and investments and estate planning. Ensure you put aside some money for fun too – you’re only young once!
2. Breaking up is hard to do
“Divorce is a game played by lawyers” — Cary Grant.
If getting married is a great way to kick-start your family’s wealth, then sadly, divorce is a sure-fire way of destroying it.
On average we get married at 30 (men)/28 (women) and 1 in 3 weddings end in divorce after 12 years. So by 42 (men)/40 (women), 1 in 3 of us are trying to extricate our intertwined finances.
According to Rita Mae Brown: “Divorce is the one human tragedy that reduces everything to cash.”
My best advice: Seek financial advice early from a trusted advisor to get your finances back on track to create and support the lifestyle you deserve.
3. Upgrading to a house you can’t afford
As our kids grow up, our first home becomes less spacious. TV shows like “The Block” and “House Rules” make us question whether we can really survive without a dedicated parents’ retreat and hi-tech media room.
Super-sizing our homes can become a financial focus rather than the mortgage or retirement savings. A larger house not only adds to the mortgage but also to our utility bills, insurance and maintenance costs.
There is no magic number for how much you should spend on a home. As your home will never make you wealthy, buy less than what you can afford and less than the bank will lend you.
4. Not reducing your mortgage
Once you’ve paid off any other debts, shift mortgage repayments into high gear. If you’re making interest-only repayments so you can afford that boat or Audi, think again.
The most financially impressive people I work with adopt an almost religious type of zeal in turbo-charging their mortgage payments in their 40s.
My rule: The sooner you pay off your family home in full, the faster you will grow your wealth and truly experience financial freedom.
5. Saving for retirement like you did in your 20s
In our 40s we can’t just put it all on the credit card and live for today. We have to save for tomorrow, and tomorrow comes a lot faster than we think.
Consider: Does leaving high school seem like a relatively recent memory? Fast forward that same 20+ year period and it takes you almost to your retirement. At retirement, you will need to support your family for the next 25+ years with no salary.
That should make it crystal clear why we must spend less and save more for our retirement today. Waiting until tomorrow just makes it harder.
6. Investing too aggressively … or too conservatively
To build the income stream to support your dream retirement, you need to start making smart investment decisions.
You have 20+ years until retirement and 25+ years beyond and so don’t hold your wealth conservatively in cash or term deposits. Conversely, don’t try to pick winners with high risk positions in speculative or geared investments.
Keep it simple. Diversify your investments, watch your investing fees and don’t take more risk than you need to.
According to Benjamin Franklin: “At 20 years of age the will reigns; at 30 the wit; at 40 the judgment.”
Our 40s are a wonderful opportunity to use that judgement to take control of our finances. By avoiding these mistakes we can confidently build our wealth and start creating our dream lifestyle.
Claire Mackay is a multi-award winning financial planner at the family-run Quantum Financial in Sydney.