Turning 40 may find you a little bit older and achier, a little more wrinkled and grey. Still while it may be getting harder to stay in the physical shape you used to be in, this is a time when you should be growing stronger financially.
Unfortunately, some people react to life in their 40s by having a midlife crisis. That sort of crisis boils down to a sense of anxiety over time that has passed and goals that haven't been met. Among other things, it can be easy to feel that way about your finances at age 40 because you are getting toward the half-way point of your working life. If you don't start securing your financial future soon, you will find that too much time has slipped away from you.
How to prevent a financial mid-life crisis
To prevent a financial mid-life crisis, here are eight things you should do once you turn 40:
1. Get a grip on your budget
Younger people are often happy just to get the bills paid and get through the month without an overdraft. By the time you are 40 though, you should be finding enough breathing room in your monthly finances to start saving money. The best way to make this happen is by planning your expenditures with a budget, and by putting part of your income into your savings accounts.
2. Assess your career opportunities
Age 40 is a critical time for your career. On the positive side, you should be about to enter your peak earning years. On the negative side, your education may be far enough in the past that your skills are no longer as competitive as they should be. Take a realistic assessment of your current job security and your prospects in the job market. This is a good time to pursue new opportunities if available, but also to refresh any skills that may have become outdated.
3. Prioritize your debts
As you start to set up a household, it is natural to find yourself accumulating debts: a mortgage, a car loan or two, credit card balances, etc. Organize those debts by ranking them in order of the interest rate you are paying, so you can prioritize the highest-interest debt to be paid off the most quickly.
4. Consolidate debt to reduce interest charges
Sorting your debt by interest rate might indicate an opportunity to reduce your interest expense by exchanging higher-interest for lower-interest debt. Examples might include using lower interest credit cards to pay off higher interest ones, taking advantage of zero-interest balance transfer credit card offers, or using a home equity loan to pay off more expensive forms of debt.
5. Review your life insurance coverage
If you first got life insurance when you were in your 20s, your life has probably changed since then. Higher income and more dependents may indicate a need for more coverage. On the other hand, if you have accumulated significant savings by your 40s, you may find that you can scale back on insurance because you've built your own safety net for your family.
6. Make a retirement savings projection
You should already be saving for retirement, but are you saving what you need to, or just what you think you can afford? Use a retirement savings calculator to see what your current pace of savings would produce in terms of retirement income. Chances are you will find that you need to dig a little deeper to support a decent retirement lifestyle.
7. Ramp up your 401(k) savings contributions
Once you know how much you need to save for retirement, make sure you are taking full advantage of the company match and tax savings available from your 401(k) plan.
8. Start a Health Savings Account
A high-deductible health care plan is often a more cost-effective form of health care insurance. If you have that kind of coverage, you are eligible to contribute to a health savings account. You can use up to $3,350 to fund individual coverage or $6,650 to fund family coverage, but what people often overlook about health savings accounts is that they can be used to accumulate long-term savings in addition to funding short-term needs.
Building long-term savings in a health savings account is appropriate because health care costs are a significant portion of retirement expenditures. As an added benefit, health savings accounts can have superior tax advantages to a 401(k) or an individual retirement account (IRA).
Whether you embrace turning 40 or you feel it is dragging you kicking and screaming into middle age, if you take the above eight steps you will find that when it comes time to turn 50, you will do so in better financial shape than you are in now.