When I turned 40, I reluctantly admitted to myself that I’d reached middle age.
Which raised all sorts of questions, many centered around money. How does my income and net worth compare to other Americans? Am I on track for retiring when I want? Am I living the lifestyle that I want, and raising my children the way I want?
These are important questions to ask, but far from the only ones. In this midway decade of your life, it’s time to jettison any remaining baggage from your childhood and young adulthood — emotional or financial — and start living your own ideal life.
Credit and Debt
Too many 40-somethings still drag around the weight of heavy debts. Before you can build real wealth, focus on becoming debt-free to relieve the pressure of unsecured debts.
1. Pay Off All Unsecured Debts
It doesn’t make sense to invest for an historically average 10% return on stocks, for example, if you’re paying 25% interest on credit card balances. Your first priority must be paying off your unsecured debts.
Use the debt snowball method to knock out your debts one by one. With each debt you pay off, you’ll have more money each month to put toward the next one, accelerating your progress over time.
You can leave your auto loan and home mortgage in place, but stop hemorrhaging money on high-interest unsecured debts as quickly as you can, so you can turn your attention toward building actual wealth.
2. Switch to Biweekly Car and Mortgage Payments
After paying off your unsecured debts, consider a more laid-back approach to your car and home loans.
Set up automated recurring payments every two weeks, for half a month’s payment. You won’t notice the difference in your monthly budget, but this strategy will pay down debts faster than making monthly payments.
Why? Because you’ll make 26 half-month payments each year — the equivalent of 13 months’ payments. That extra monthly payment each year will shave time and interest off your loan.
You can get more aggressive with higher payments of course, if you want to pay down your loans even faster. But this strategy works well because it feels “invisible” in your budget.
3. Push Your Credit Score over 800
More doors open up to people with higher credit scores.
If you don’t have perfect credit, figure out why not — and start working on improving it. Pull your credit report for free from AnnualCreditReport.com, and look it over. Then open an account with Mint or Credit Karma to monitor your credit and view suggestions for improving it.
Fortunately, paying off your credit card balances does wonders for your credit score. Read up on other ways to improve your credit score, and lay the groundwork for cheaper, easier credit the next time you need it.
Everyone needs financial safety nets, and no one more so than families with young children, as so many 40-somethings have at home. Make sure you manage your family’s risk effectively with the following safety nets.
4. Emergency Fund
Some people need a larger emergency fund than others. Exactly how much you need depends on the stability of your income and expenses, and how you hold your emergency fund.
Emergency funds are measured by the number of months’ worth of expenses they can cover. While two months’ expenses might be enough for someone with an extremely secure job and stable expenses, someone with fluctuating income or expenses might need as much as 12 months’ expenses set aside.
If you don’t have anything set aside in emergency savings, start by putting $1,000 in a high-yield savings account at an online bank like GO2Bank. From there, you can build up your emergency fund, and add layers to it based on your own risk tolerance.
5. Health Insurance
Everyone needs health insurance at all times. Period.
A friend of mine had a gap of three weeks between jobs, and went without coverage during that time. Sure enough, that’s when he broke his arm. A perfect example of Murphy’s Law hard at work.
Again, individuals’ needs vary; some people are better off with high-premium, low-deductible insurance, while others are better off with a high-deductible insurance plan combined with a health savings account (HSA).
And just because your employer doesn’t offer insurance doesn’t mean you should skip it. Try these options for health insurance without employer coverage.
6. Extensive Homeowners or Renters Insurance Coverage
For homeowners, insurance covers both the building itself and all your personal belongings. Given that your home is almost certainly your largest asset, you need strong coverage to protect it.
Renters insurance just covers your personal belongings, which still matter because losing all your worldly possessions would probably constitute a financial crisis too.
Note that you can and should include high-value belongings as specific inclusions on your policy. For example, my wife’s engagement ring is a family heirloom, and worth far more than all our other belongings combined. So we listed it as a specific inclusion on our homeowners insurance policy, and had to provide them with documentation such as an appraisal.
7. Life Insurance
Not everyone needs life insurance. But some do, and particularly families dependent on a single earner to make ends meet.
That goes for single-breadwinner families of course, but it also applies to any family that would be in financial trouble if one spouse died. For instance, in families where both partners work but one earns 75% of the household income, that partner should likely be insured.
Single-parent households should also consider life insurance, particularly if the caretaker designated in your will would be financially strapped by taking on the care of your children.
8. Disability Insurance
Similar logic applies to disability insurance: if your family relies heavily on one earner, you should consider how to protect against losing their income, which could happen due to an injury or disability, not just death.
Unlike life insurance, single people with no dependents might need disability coverage as well. If you suffer a disability, you still need to cover your own living expenses, after all.
Lifestyle and Budget
It’s all too easy to blindly chase more money, and assume that higher incomes mean a better lifestyle. As someone who took a paycut and moved overseas, I can personally attest that there’s far more to lifestyle than your income.
9. Reevaluate Your Lifestyle and Career
Do you love your work? Not just like it well enough, but truly feel passionate about it?
What about the hours you work, both in total number and when you work them? Do you love the town where you live?
The midway point in your career is a perfect time to reflect on where you are, how you got there, and whether it’s delivering the actual life you want to live. Too many people fall into their careers by accident. They gradually earn more, and immediately spend more with each raise, in a perpetual cycle of lifestyle inflation.
That creates a golden handcuff, where taking a paycut would force them to overhaul their spending and lifestyle.
Take some time to explore the concept of lifestyle design. Start thinking about what your own ideal life would look like — and then start mapping a route to get there.
It could involve a job or career change, moving to a new state or country, switching to remote work, setting your own hours, or any number of other dramatic changes. You don’t have to do it all at once, but form a plan and make it a reality.
10. Overhaul Your Budget
If you consider budgeting the “B” word, it’s time to change your attitude along with your budget.
Wealth comes from the gap between what you earn and what you spend — in other words, your savings rate. To build wealth, you need to grow that savings rate.
Which almost certainly involves taking your budget more seriously.
Start by creating a brand new ideal budget in Google Sheets or with an a company like Tiller. From there, you can draw up your current spending, and close the distance between your current and your ideal spending in each budget category.
You’re halfway through your career. If you aren’t serious about saving now, when will you be?
11. Talk About Your Parents’ Plans
In your 40s, your parents often start aging faster. That can leave 40-somethings as a “sandwich generation,” stuck in the middle caring for both young children and aging parents simultaneously.
That care can come in many forms. It could mean helping their parents out with money, or paying a live-in caregiver, or paying for a nursing home. It could even mean moving a parent in with you, and even providing physical care for them yourself.
According to a study by Care.com, nearly one-third of adults end up providing financial help to their parents. That’s an expense on top of their own bills, their own child care responsibilities, and their own hopes and dreams.
Talk to your parents about their plans, and about their financial assets. Together, come up with both a Plan A and several contingency plans for their long-term care. For example, Plan A might be aging in place in their home. If their health starts failing, the first contingency plan is bringing in an in-home caregiver. The next contingency plan could involve them moving in with you or one of your siblings. A final contingency plan could be a nursing home if they become more work than you or your siblings can manage.
Make sure you can financially handle each contingency plan, no matter how healthy your parents are today.
Finally, triple check that your spouse is absolutely, positively, 100% on board with your and your parents’ plans. If they have any reservations, expect stormy seas ahead.
12. Rethink Your Housing
Your housing needs change and evolve over time. If you have children or aging parents living with you, you probably still need that large house that so many 40-somethings find themselves inhabiting.
But if you had children when you were on the younger side, they might already be moving out while you’re in your 40s. Do you really need that large suburban home with the huge yard, the high utility bills, and the constant maintenance work? Consider downsizing to simplify your life and your finances.
If you plan to move out of state, make sure you consider states with lower housing costs or lower tax burdens. For that matter, you could move to another country with a lower cost of living and live large on just $2,000 per month.
Or you can house hack to eliminate your housing payment entirely. Given that housing is the largest expense for most families, ditching it means supercharging your savings rate.
13. Ditch the Status Symbols
By your 40s, you’re old enough to let go of the conspicuous consumption and status symbols that distract so many younger adults — and keep them broke.
The paradox of wealth is that the more you spend on the appearance of wealth, the less actual wealth you have. Imagine that you could technically qualify for a $40,000 car loan at 6% interest to buy a BMW, or you could buy a used Hyundai for $5,000 in cash. In one scenario you borrow $40,000 over five years, racking up $6,398.60 in interest, for a total of $46,398.60. In the other, you pay $5,000 once and avoid a $773.31 monthly payment and five years of debt entirely.
Yes, the new BMW would be exciting for the first week or two. You’d get to show it off to your friends, to compulsory oohs and ahs. Then it would just fade into the background and serve the exact same purpose as the used Hyundai: a way to get from Point A to Point B.
Real wealth exists on paper, or more accurately in ones and zeroes in your brokerage account and other financial accounts. It’s not flashy, you can’t drive it or host friends to dinner parties there. But it will create passive income for you, let you retire early, pay for your kids’ college education, buy citizenship in another country, or let you live your ideal lifestyle.
Get over showing off your success, and start creating true wealth.
Career and Income
Your 40s should be prime earning years in your career. If you aren’t happy with your career or income, now is the time to make a change.
14. Beware of Stagnation
A troubling report by the New York Fed found that almost all of American men’s earning growth takes place before age 35. After that, income stagnates.
If your own career has gone a bit stale, you can read those findings in one of two ways. You could read it with fatalistic indifference, shrugging and saying “Guess it’s all downhill from here.” Or you can read it as a wake-up call, and slap yourself awake to go out and make that career change you’ve been considering before it’s too late.
The Fed study found an exception to the overall trend. The top 10% of earners didn’t see their income level off around age 35 — theirs kept rising.
Sort yourself into whichever camp you prefer, but take responsibility for the choice.
15. Keep Learning and Growing
How do you continue growing your income past age 35? By continuing to grow yourself.
Get new certifications to keep you in the top of your field. Get a new degree if it will help advance your career and earning potential. Subscribe to industry newsletters and publications, and financial newsletters to boost your investing IQ.
If you want to stay competitive, to continue climbing in your career, you need to become more knowledgeable than your peers. Average isn’t good enough if you don’t want your income to stagnate.
While you’re learning new skills, learn how to negotiate. You don’t get what you deserve in life, you get what you negotiate, so learn how to negotiate a higher salary, better benefits, and more flexibility in your work.
16. Consider a Fun Side Business
You might think side hustles are for 20-somethings. You’d be wrong.
Consider starting a business on the side of your full-time job. Do it for fun, do it for the experience, do it to make some extra money. It might just turn into your full-time gig rather than a side gig.
Your 40s are the prime age for starting a successful business. A study by the Census Bureau and two MIT professors analyzed 27 million startups, and found an average age of the most successful founders was 45. They went on to show that a 40-year-old founder was more than twice as likely to launch a successful company than a 25-year-old founder.
It turns out that your greater experience, professional network, and even wisdom actually go a long way in the world of entrepreneurship. Who’d have thought?
Investing and Planning
The future doesn’t look quite so far away once you reach your 40s.
If you feel behind on investing and planning for your financial future, it’s time to get cracking. As the proverb goes, the best time to plant a tree was 20 years ago. The second best time is now.
17. Set a Date for Financial Independence
I know middle-class people who retired in their 30s and early 40s. While that ship may have sailed for you, you can follow the same strategies they used to reach financial independence quickly.
If you’re willing to budget and save accordingly, that is.
As soon as you can cover your living expenses with passive income from your investments, you reach financial independence. Work becomes optional at that point, and you can go pursue your passions.
That might mean volunteering full-time, or working for a nonprofit, or simply switching to that career that doesn’t pay a huge salary but which you always wished you’d had the courage to pursue. Or it could simply mean reducing your hours and spending more time with your family, or just retiring young.
Read up on how much you need for retirement and how much to save and invest in order to reach financial independence quickly. You might be surprised at how feasible it is once you get serious about saving and investing.
Set a target date, and make it happen.
18. Take Advantage of Matching Contributions
If your employer offers to match your contributions to a retirement plan, it’s effectively free money. But you have to choose to take it.
There are plenty of financial questions that come with long-winded, complex answers. But this isn’t one of them — take full advantage of your employer’s matching contributions to your 401(k) or SIMPLE IRA. Full stop.
19. Reevaluate Your Investment Advisor
Do you have an investment advisor?
If not, and your net worth is under $500,000 or so, open an account with one of the best robo-advisors in the market. Many are free, and the others are affordable.
People with net worths over $500,000 can start thinking about using a human investment advisor rather than a robo-advisor. But the simple truth is that the better robo-advisors offer human hybrid investing at a fraction of the price of traditional human advisors, so you may be better off simply upgrading your robo-advisor to a human hybrid advising plan.
Regardless of what type of advisor you use, you should use an investment advisor, even if only a free robo-advisor. They can set an appropriate investment portfolio for you, automate your transfers and investments in it, and rebalance it automatically.
Pro tip: Have you considered hiring a financial advisor but don’t want to pay the high fees? Enter Vanguard Personal Advisor Services. When you sign up, you’ll work closely with an advisor to create a custom investment plan that can help you meet your financial goals. Learn more about Vanguard Personal Advisor Services.
20. Optimize Your Tax-Sheltered Accounts
The more money you shower on Uncle Sam, the less you have for your own long-term goals.
Take advantage of tax-sheltered retirement, education, and health care accounts to minimize your losses to the IRS. Combine your IRA contributions with an employer-sponsored retirement account. For that matter, consider using an HSA as another retirement savings account. It comes with the best tax advantages of any account in the U.S., after all.
And if you want to help your children with their college costs, look to tax-sheltered accounts for them too.
21. Make a Plan for Your Children’s Education
You may decide not to help out with your kids’ college education expenses, and there’s nothing wrong with that. But if you do want to contribute something, follow a few rules.
First, prioritize your own retirement investments before your kids’ college expenses. Your kids have dozens of ways they can pay for college, but if you run out of money in your older years, you have almost no options.
Second, proceed with caution before investing in a state-run 529 plan. If your child goes to school in another state or overseas, or doesn’t go to college at all, you could get hit with penalties and red tape. Consider an ESA as another option, but it too requires that you put withdrawals toward education costs or suffer penalties.
Finally, don’t fall into the trap of thinking one-dimensionally about paying for your children’s education. Get creative, and combine many different ways to help them with education costs.
Invest flexibly, because you simply don’t know what your child will end up doing.
22. Stick with Stocks
In your 40s, you still have enough time on your side to stick with investing in high-return, high-volatility stocks rather than getting conservative with bonds. In the perpetual low-interest environment that has become the new normal in recent memory, bonds simply can’t generate high enough returns for someone still years away from retirement.
Yes, the stock market could crash. So what? You don’t need to withdraw the money any time soon. Consider it a fire sale and buy up even more stocks while they’re available at a discount.
23. Consider Diversifying into Real Estate
If you don’t have the time or the stomach for buying real estate directly, consider investing through real estate crowdfunding platforms. Some work like real estate investment trusts (REITs), but you buy and sell shares directly from the company rather than on stock exchanges.
You can invest in equity REITs that own properties — whether apartment buildings, office buildings, or other types of real estate — or lend money secured against real estate. Some REITs combine both ownership and loans. Try Fundrise or Streitwise as private REITs that allow non-accredited investors.
Other crowdfunding platforms let you pick and choose loans to fund. For example, GroundFloor allows you to invest as little as $10 toward any given loan. They too allow non-accredited investors for short-term loans rather than long-term commitments.
But crowdfunding isn’t the only way to invest indirectly in real estate. Try these ideas to invest passively in real estate, without the 3am tenant phone calls.
24. Make an Estate Plan
If you don’t have an estate plan by your 40s, you certainly need one now.
Your will dictates who should raise your children if you die unexpectedly, along with how your assets should be divided, who must assume responsibility for seeing it done, and optionally other directives like your funeral wishes. Try Trust & Will as a simple but effective way to create a will.
But estate planning doesn’t end with your will. You should also lay out your health care wishes in a living will, advance directive, or power of attorney in case you become incapacitated. You might wish to create a trust.
Start with online estate planning services with a company like Trust & Will if you have modest assets with no complications. But don’t hesitate to speak with an estate planning attorney for more complex or nuanced questions and assets.
25. Track 3 Numbers Each Month
I like to track three simple numbers each month as a report card of my progress.
First, track your savings rate: the percentage of your income that went toward savings, investments, or extra debt payments. The higher your savings rate, the faster you build wealth.
Second, monitor your wealth by tracking your net worth. It fluctuates along with financial markets, but watching it grow over time reminds you why you’re saving and investing money rather than buying new clothing, gadgets, or other treats every month. Try Mint or Personal Capital to track your net worth automatically.
Finally, track your FIRE ratio or FI ratio. The acronym stands for financial independence/retire early, and it simply tracks the percentage of your living expenses that you can cover with passive income from investments. If you spend $4,000 per month and earn $1,000 in passive income, you have a FIRE ratio of 25%. Once you reach 100%, you’ve reached financial independence, and working becomes optional.
All told, tracking your progress need only take you around 10 minutes per month. But that which gets measured gets done, so measure your financial progress to keep your eyes on the prize.
Your 40s can feel like you’re constantly running but never actually getting anywhere. You drive your children all over the city, every day of the week. You help your parents out whenever they need it, which becomes increasingly often. Meanwhile, you’re in your peak earning years, with all the demands that entails. None of which leaves much time for a social life, hobbies, or personal time.
With all that busyness, you probably don’t spare many thoughts for your finances and long-term goals. But a little forethought and a few smart money moves go a long way in helping you reach those financial goals faster, which in turn gives you more flexibility to create your perfect life.