Financially speaking, your 40s is the best decade of your life. According to a survey by PayScale.com, it is typically the time when men and women reach their peak earning potential.
People are getting much bigger paycheck than they were in their 20s or 30s.
Yet, with a fatter paycheck comes this paradox. The bigger your paycheck, the less you actually keep.
The reason? The bigger your income, the more you actually spend. It’s the law of money at work.
Will you stay in the same modest house or drive the same clunker if you start earning a much bigger income? (Or won the lottery, perhaps).
That’s because the ones who will are the exception rather than the rule.
When you plot in a graph a person’s income and his spending, you’ll see that the latter almost automatically follows his income curve!
Whatever the reason is, it’s best to make adjustments now to avoid hurting our future income, or stealing from our 65-year-old self.
Common Money Mistakes that People do in their 40s and Possible Remedies
Not saving enough for retirement
Making more income can make you feel more confident about buying because you can afford now than ever before. The result? You could be saving less than you need to because most of your cash just goes to purchases or making up for those times you had swiped your credit cards.
Sometimes, income can create a false sense of wealth. Remember, income is not wealth; it’s what you keep from your income that creates wealth.
Remember also that as your income may plateau at the time when it reaches its peak. Meaning, when income has reached its all-time highs, it usually does not experience any significant increase any more.
It’s wrong to suspend saving money because you assume that your income will continue to increase. Save now, not later…because who knows what’s in store for us.
Treating your 401(k) like an emergency fund
Every once in a while, life shakes us with little surprises. That’s what our emergency funds are for. Ideally, you should have an emergency stash worth 3-6 months of your expenses.
In a 2013 study by Bloomberg, however, roughly 33 percent of workers in their 40s cashed out their 401(k) when they switched jobs, an “emergency” situation” which should have been remedied easily by an emergency fund.
Dipping into your 401(k) every now and then not only incurs early withdrawal penalties on your part. You could also be hurting your potential for gains than if you just leave your retirement money invested through thick and thin.
Let’s face it, 40 isn’t that far away from 65. Not taking your retirement savings seriously can hurt you in the long run.
Unnecessarily supporting your children
As parents, it’s understandable to want the best for your children. However, babysitting your 20somethings or 30somethings should not count as “best” (either for you or for them). Much less if they already have their own family.
Cash gifts are okay because they are seldom given, but paying for rent, cellphone plans, or car loans? They might be too much.
You are putting unnecessary pressure on your income instead of saving more for your own retirement.
Let your kids on their own and they will be resourceful enough to manage their own finances.
Paying only minimum or neglecting credit card debts
Time and again, we keep reminding everyone, especially people in their 40s to pay off their monster debts such as credit cards.
Don’t take care of your debts. Chase them away, instead.
Paying for debts even when you are young is difficult enough; paying them down when you are in a race to save more for retirement can seem insurmountable.
Ideally, you should be debt-free at this stage in your life, or at least, your debt should very manageable that even your cash savings can wipe it away.
If you are deciding between your credit card debts and your mortgage debts, you should prioritize credit card debts first. Neglecting them can be costly as they rake in interests at a rapid rate.