Every decade of life has its financial challenges and opportunities.
In your 20s, you worry more about where you're getting your next drink than your finances.
Your 30s brings a whole bunch of responsibilities such as kids, mortgages and building a career.
However, your 40s are especially important because you're getting closer to retirement and there is now less time to recover from poor decision making. Making financial mistakes in your 20s isn’t nearly as devastating to your long-term prospects as doing so in your 40s. It's getting serious now.
To help, here are 12 financial tips to ensure you capitalise on your hard work and avoid the costly mistakes in your 40s:
1. Ask for a pay rise
Have you been a valuable contributor to your workplace for a long time? If so, ask for a pay rise. Smart employers don't let good people go. They generally pay them what they're worth in order to have them stay. Getting a raise now, and investing the extra funds over the next decade or two could make a huge impact on the size of your nest egg.
2. Avoid lifestyle inflation
When you're in your 40's, you should be pretty well established in your career or business and resultantly should be making decent money. You can now afford many of the things that you had to forgo in your 20's and 30's however it's important to avoid the trap of lifestyle inflation. This is where your spending rises just as quickly as your income and it's an all too common problem.
While we recommended enjoying a few more luxuries than before, if you lose track of what you're spending and let your lifestyle inflate too much, your net gain with be zero. This isn't your 20's, you can't afford to do that anymore.
3. Bump up super contributions
Check your super balance and divide the figure by 20. This will give you the level of income you would earn if you got a five percent return on these funds in retirement. You'll find it's barely enough to fill your car with petrol and maintain your health insurance for 12 months.
Instead of putting your extra income to lifestyle inflation, it might be better being put towards your retirement through a salary sacrifice arrangement. This will help to reduce your personal income tax and get more money into the most tax effective place most people have to invest, your super.
4. Unlock equity
If you've got equity in your home, you might want to consider using it (if you haven't already). Equity is the difference between the value of your asset and the debt you have against it. So if your home is worth $700,000 and you owe $300,000, you have $400,000 in equity.
You can use this equity as security and borrow against it for many purposes of which most importantly is to purchase assets that will grow in value. You should be considering shares, managed funds, property or a combination of each depending on your needs, goals and current market conditions.
5. Teach your kids good money habits
Your kids are now at least old enough to be earning some pocket money and potentially old enough to be working full-time. Now is the time to make sure they respect money and the hard work required to get it. Incentivise them to save for something that care about by chipping in or matching their savings. Helping them build good financial habits now will allow them to get on their own two feet sooner and be less likely to be turning to you as their 'bailout' bank in the future.
6. Stop thinking any asset is a good one
We frequently meet people who believe that buying any asset is a good idea (generally residential property). You need to make sure you that you don't just build an asset base but build one full of good assets. Consider getting rid of long-time under performing investments and redirect these funds elsewhere. Often your ability to borrow is tied up in these investments which comes at a significant opportunity cost (the cost of what else you could have done with these funds).
7. Considering a refinance
Have mortgage rates dropped since you bought your house? When you consider the fact that we have record low rates right now, it's probable that they have. If so, consider refinancing your home. There's plenty of competition right now between lenders all hoping to look after your debt for you (they're a generous bunch). Talk to a mortgage broker about your options and what sort of savings you might make by reducing your borrowing costs through a refinance. You can use what you save on interest costs to go towards a holiday, the kids or your future.
8. Be careful when it comes to home improvements
It's likely that you now have a nice amount of equity built up in your home so it’s tempting to get a loan and use that money to improve the place. However, it’s important to understand that home improvements are often not great investments. You’ll put the money in, but you may not recoup it if you decide to sell. Think carefully about which home improvements you make, how much they cost, how you fund them and weigh this against other goals you have and your retirement prospects.
9. Get clear on your goals
This should have been tip number one. Get clear on what your priorities are ensure that the financial decisions you make and the investments you choose are aligned to these. If you're considering starting a business in the next few years, it might not be a good idea to be putting extra money in super. If you're feeling some stress with the monthly bills, don't upgrade your car. These are just a few examples. The clearer you are on where you're going, the better filters you will have to understand what will move you in the right direction, even down to making better decisions with all your small daily purchases.
10. Get a will
If you don’t have a will yet, get one organised now. You've put this one off long enough. If you already have a will, check to make sure that it still reflects your wishes. Your will is your best chance of making sure that when you pass, the people you care most about benefit most from your hard work. Passing without a will is referred to as 'dying intestate' which means that state laws determine who your beneficiaries are and in what proportion. Chances are they won't know your wishes as well as you.
11. Don't panic sell
The prospect of retirement starts to loom larger now that you're in your 40's. As a result, you might be more inclined to get nervous when you experience market volatility and you're investments start to fall in value. It's vital that this nervousness doesn't result in panic selling.
You're still in your 40's and still have a long-term investment time frame. Selling when markets are low and locking in losses will likely be one of the worst financial decisions you ever make.
12. Enjoy your money now
While you do want to use your 40s as a time to really get ahead and set yourself up for the future, don’t forget to enjoy your money now. You’ve worked hard to get to this point, and if you can afford some of the pleasures of life, go ahead and do so. You don’t want to wake up 20 years from now regretting that you completely wasted your 40s even though you didn’t have to.
Got value from this article?
Maybe should you be at our Financial Advice Workshop on June 2nd.