As you inch closer to retirement, it’s important to be financially prepared for the costly expenses that come with age. Be careful not to make serious financial mistakes because you won’t have as much time to correct them. We spoke with the experts who shared the common money mistakes to avoid when you’re in your 40s.
Here are the top 25 financial mistakes people make in their 40s, according to the pros:
1. Not Saving for Their Children’s College
Mark Charnet, Founder & CEO, American Prosperity Group
People in their 40s should now be saving heavily for college expenses for their children. Whatever can be allocated in this direction will be helpful, but make investments that may be used for expenses other than higher education in case the children decide not to attend college or want to use the money for other purposes. Everyone needs to learn the proper way to save and invest—and to apply those skills as soon as possible. Live below—not within—your means, earn more money, and make more sacrifices and compromises to cut expenditures and increase investing.
2. Not Contributing Enough to Their Retirement Plan at Work
Eric Hutchinson, CFP & Managing Director, United Capital Financial Life Management
One common mistake many people make is not contributing enough to their retirement plan at work or for some, not even contributing at all. If your employer offers a retirement plan such as a 401(k) or 403(b), it is very important to take full advantage of it to help you prepare yourself for a comfortable retirement. If you are not a participant, get enrolled right away. If your employer offers matching funds, at least contribute enough to qualify to get 100 percent of available matching funds. Once you start contributing, make it a personal goal to gradually increase your contributions over time. For most people, increasing contributions by one or two percent at a time will barely be felt in your take-home paycheck. If you keep increasing a little bit at a time, you can incrementally grow your contribution rate to improve your readiness for retirement. A good “rule of thumb” is to aim for saving 10 percent to 15 percent of your income toward retirement.
3. Not Paying Off High-Interest Debt First
Holly Peterson, Owner, Elite Retirement Strategies
If you are saving at the expense of not paying off your current debt, especially your high-interest debt, you are being counterintuitive. You’ll be better off eliminating your high-interest debt first. One way to do this is with one of the free online “snowball” calculators. With that, you can easily determine how much you will save on interest if you remove your high-interest debt first. If you are attempting to save money before you pay down debt, it could cost you more than you are saving. Make sure that if you are saving before paying off debt first, that the savings vehicle you are using is going to make more than what it will cost you in interest on your debt.
4. Slowing Down Professionally, Thinking You’re Over Your Prime
Dr. Sabrina Kay, Chancellor & CEO, Fremont Private Investments
Turning 40 is an emotional thing. It may feel that you’re over your prime. But in reality, most people make most of their money in their 40s and 50s. So, keep learning and growing like you’re starting out. Learn new things to be a super expert at what you do and improve your value as a professional. We make money by applying our knowledge. So if your business needs to enhance social media and marketing, go to conferences or take digital marketing courses. If you want to learn more about investing, join investor groups and subscribe to podcasts about investing. Once you start applying this knowledge in your daily life, you will grow and mature in your 40s as your professional prime. Don’t slow down. Work as hard as you can and build your wealth while enjoying life.
5. Staying Complacent Carrying High-interest Consumer Debt
Benny Ganatra, CEO, Americor
One common mistake is staying complacent carrying high-interest consumer debt. Avoid making minimum payments that only go toward accruing interest by paying off your credit cards each month. Then take that money and grow your retirement and emergency funds for a better financial future. By the time you’re in your 40s, it’s time to stop making the same old, bad financial habits. If you haven’t already, now is the time to make a feasible plan for your money—one that is realistic and practical.
6. Prioritizing Your Children’s Expenses at the Expense of their Own Financial Health
Paul Ruedi Jr., Financial Advisor, Ruedi Wealth Management
People naturally want the best for their children, and expenses for things like education and extracurricular activities can add up quickly. But it’s important to remember that the most valuable gift parents can give their children is remaining financially independent themselves. In the worst cases, parents who prioritize spending on their children’s education and lifestyle to the extent that it costs them financially can end up dependent on those children down the road. As with all financial planning issues, it is important to find the right balance by spending enough to provide your children with plenty of opportunities without costing yourself financially. It is helpful to establish a financial plan that shows the required amount of yearly saving to achieve your most important goals so you can make sure you save enough, but can feel free to spend the rest as you please.
7. Not Creating an Estate Plan or Will
Megan Luke, SVP – Retail Distribution Sales & Service/Operations Director, PNC Bank
It might be morbid to think about, but you need to create a will that explicitly states what your last wishes are regarding your personal items and, most importantly, your children. People in their 40s typically still have minor children, but it’s scary when you see how few of them have legal documents that state what will happen to their children if the unthinkable happens. Even if you already have a will or estate plan, make sure you regularly review it. Things may have changed over the past year, and you want to ensure your plan reflects your current lifestyle and family situation. When reviewing your estate plan, give yourself a refresher on who is in there and whether it reflects recent life changes. It should also include things like standby guardianship and power holders (for example, medical power of attorney).
8. Treating Your Home Equity as if It Were a Piggy Bank
Steven Millstein, Certified Credit Counselor, CreditRepairExpert
One of the most common financial mistakes people in their 40s make is treating their home equity as it if were a piggy bank. Every time you refinance and withdraw cash against your home equity, you are giving away ownership to someone else. This ends up costing you thousands of dollars in interest and fees. You should really avoid this practice, as you’re banking on your property continually increasing in value—which we know isn’t always the case. A savvy homeowner will instead look to build and increase equity and not make payments in perpetuity. Further, you can end up paying a lot more than your home is actually worth, which is a recipe for disaster.
9. Failing to Review Their Life Insurance Policies
Matt Schmidt, CEO, Diabetes Life Solutions
Many people take out a term life insurance policy or an employer-owned policy in their 20s or 30s and forget to review them. Most people won’t stick with the same employer through their working years, and could transfer to a job that doesn’t offer group life insurance. If you wait until you’re older to reapply, rates could cost you thousands more per year. Also, if you developed a significant health issue, you may not even be eligible for a new policy. So it’s best to ensure that your life insurance portfolio is structured properly and that you’ll have life insurance coverage through your 50s and 60s.
10. Not Setting Clear Goals & Expectations with Their Children When It Comes to College Funding
David Flores Wilson, Senior Wealth Manager, Watts Capital Partners
Couples in their 40s often overextend themselves financially and get completely off track with retirement by not setting proper expectations and guidelines for their child when it comes to college selection and funding. To avoid this, set clear goals and expectations with your children before the college years so that your child’s options stay within an affordable range. Remove emotion from this process in order to make informed decisions on admissions. Thoroughly determine the true cost of colleges, take a proactive scholarship strategy, analyze financial aid offers thoroughly, and then choose the right school with your child. With the right process, you can fund college without robbing from retirement and have your child graduate with manageable student loan debt.
11. Believing It’s Too Late to Start Saving Now
Dustyn Ferguson, Founder, Dime Will Tell
While it’s true that it would have been wise to contribute to a 401(k), build an emergency fund, and have other financial plans in place at the age of 20, it’s a good idea to remember this old Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.” It’s better to start your 401(k) today, rather than tomorrow. Saving your first couple dollars for an emergency fund is better done this week than the next. It is never too late, unless you put it off until tomorrow. Start now—your future self will thank you no matter how old you are right now.
12. Not Taking Advantage of the Power of Compounding
Randy Kurtz, Chief Investment Officer, Betavisor
People in their forties have a lot of financial responsibilities, often including kids, but they often miss a very large financial responsibility—the responsibility to save as early as they could for their future. People in their forties should take advantage of the power of compounding, and should be saving as much as possible in their investment accounts. Merely saving into the company 401(k) is not enough—they should also save after-tax money in a brokerage account.
13. Spending Too Much on a House
Chelsea Knapp, Financial Advisor & Partner, Transparent Wealth Consulting, LLC
Many people will move into a larger house in their 40s as their families grow and they have experienced an increase in income. As they upgrade from what was their original “starter” home, where they perhaps stuck to a budget more (knowing it was just a stepping stone), their eyes can get a bit large for their budget. Their credit scores may be significantly better with a longer history and they may get approved for a larger mortgage. They may even think this is a good investment. However, your primary residence shouldn’t be considered an investment. This lifestyle creep can considerably hold people back in their 40s, when they should be looking at ways to boost their investing. They need to figure out what their family needs in terms of size, neighborhood, school district, the location from work, tax expense—and then figure out what monthly payment would fit their budget. After that, they need to stick with this plan and not let the temptation of lifestyle creep throw them off track.
14. Not Considering Changing the Cost of Higher Education
Peyton Jamison, Certified Financial Planner, Jamison Private Wealth Management
Higher education costs have increased dramatically over the past few years compared to other economic costs. Opening a 529 Plan, which is a tax-advantaged investment vehicle, and funding it on a monthly basis is the smartest move. The tax-deferred funds grow and are tax-free when withdrawn for educational purposes. Some states even offer a small income tax deduction. The funds can also be transferred to another sibling in case the primary beneficiary does not use them for educational purposes.
15. Pushing Saving to Their 50s
Matthew Ayers, Client Advisor, Alex Brown – Raymond James Financial Advisors
The biggest money mistake people make in their 40s is pushing saving to their 50s. In your 40s, you are nearing your peak spending—family is growing, and houses, cars, and schools are all expensive. You haven’t reached your peak earnings yet, which is usually in your late 50s, and you make the common mistake of spending now and saving for retirement in your 50s. You neglect the simple principle of compounding annual growth. Spend less than you could in your 40s so you can save more now.
16. Carrying a Balance on Your Credit Cards
Tony Drake, CFP, CEO & Founder, Drake & Associates
Credit card debt can turn into a big issue in your 40s. You really don’t want to be paying the high interest that comes with carrying a balance on your credit cards. Your 40s are a great time to prioritize paying off your credit cards by using the snowball method. Start by paying down the lowest balance first. Once that is paid off, move to the second lowest, and so on and so forth. You’ll build momentum as you pay off each card.
17. Splurging on Unnecessary Material Things
Ellie Thompson, CEO, Money Therapy
For many individuals, the 40s are a time to splurge. You “owe” yourself a nice car, home, and other gadgets. However, many forget that in a few short years, they may be sending a child to college or wanting to retire, leaving them in regret. Many wish they spent as much time saving as they did splurging. Do yourself a favor and increase your savings by 10 percent—this way you can still splurge, but you know you are also saving.
18. Making a Sudden Change in Career That Compromises Your Retirement Funds
Roslyn Lash, Accredited Financial Counselor, FinCoach Consulting
Once you hit your 40s, you’ve been in the workforce for 20 or more years. It’s not uncommon for your interest to change, which will lead to a change in career. That’s not unexpected, as the average person will have three careers over their lifetime. However, when you allow the change to create a future hardship, then that’s a big deal. For example, you are starting a new company or are in between jobs and you begin living on your retirement. These are funds that you will never recoup. Therefore, leave your retirement funds in the account. It should be used for its designated purpose, which is your retirement.
19. Not Keeping Track of Their Expenses
Jeff Benowitz, Financial Advisor, Certified Financial Services
Many people in their 40s still fail to keep track of each daily expenditure. It’s important to keep a record of your expenses, as this will allow you to see where your money is being spent. This also makes it easier to see which expenses are not necessary so you can minimize or totally cut them out to be able to save more.
Early to Rise says it’s easy to assume that your income will keep on growing as you grow older. However, the truth is the risk of losing your income gets higher as you get older. People in their 40s should plan for a flattening income curve and job security. Do not fall into the trap of assuming that your best earnings are yet to come.
People in their 40s usually have so many responsibilities that most of their income goes to their financial obligations. Some even make the mistake of getting money out of their retirement savings when there’s an emergency. This is the reason why Fatherly encourages everyone to have at least three to six months’ worth of living expenses in a cash reserve to ensure that you have something to use in case unexpected things happen.
According to Wise Bread, spending a huge chunk of money on an expensive home remodel is one of the biggest mistakes people in their 40s make. It’s even worse if you finance these home renovation costs by borrowing from an existing home equity or a 401(k) account. You don’t want to add up to your monthly obligations to pay another loan or to touch the funds that are supposedly saved for your retirement.
As you grow old, your personal and financial needs change. According to myFICO, a common mistake people make in their 40s is not increasing their retirement savings. You can’t continue to save the same amount as you did 10 or 20 years ago. It’s best to review your personal finances, assess your financial goals, and update your retirement savings regularly.
People in their 40s often need to upgrade their homes to have enough space for their growing family. However, if you need to upgrade your mortgage, make sure that you understand how this additional expense will affect your retirement savings. FJY Financial reminds us that a mortgage should be something manageable and should not threaten to consume your life savings.
Some 40-something individuals who are in financial distress often seek financial advice. However, according to SeaComm, paying too much for a financial advice, especially when you’re already in financial difficulty, is another money mistake you should avoid. It’s best to work with financial companies that do not charge too much for financial advisor services.
As you grow older, your financial obligations increase, as do your financial risks. The last thing you want to happen is to journey towards your retirement years in financial distress. If you want to be financially stable and live a comfortable retirement when you get old, make sure to avoid these common money mistakes people make in their 40s.