Finance In Your 40’s – a financial guide for people in their 40’s

This article is written out of genuine concern for people in my stage of life. You see, I’m in my 40’s, married with two kids – one in primary school and one about to start high school. I’ve worked in the financial planning industry since 1996, so you could say I’ve learnt a bit about money over that period of time.

I mix with a lot of people of my generation, and I hear some stories that disturb me greatly.

  • I see some families spending more than what they earn, going more and more into debt, all because they want things now.
  • I see families who have suffered extreme hardship due to sickness or injuries that have almost destroyed their lives.
  • I see families with huge debts that they struggle to repay month after month.
  • I see very few families who are thinking of one day in the future when they may want to finish work and retire.
  • I see families buying investment properties, because ‘that’s what you do’.

I’ve written this article because I want to lay out a blueprint of things that people of this age group need to be thinking about. I’ll raise some issues that may be painful to talk about, but they need to be said. This article is only general in nature – remember, your financial situation is unique and you should find out what is suitable for your needs and circumstances. A good financial planner can help you with this.

Also, whilst I’m writing this article from the perspective of a traditional family (two adults and any number of children), it’s still relevant to anyone in this stage of life, with or without kids and /or partners.

Financial Planning for Families

Understand Your Current Financial Position

This may seem boring, but extremely necessary. You don’t start a journey without understanding where you’re starting from.

Look at your payslips and find out how much you earn – both gross (before-tax) and net (after-tax). Convert this amount to weekly, fortnight and yearly figures.

Do you know how much you spend? If you have a budget or keep records of your spending, are you spending less that what you earn? If you don’t keep records, do you know the answer to this question? Are your bank accounts growing or are your debts increasing each year?

Make a list of your assets and liabilities – things you own and things you owe. Review all your loans and credit cards – make a list of the amounts owing, interest rate your paying and the monthly repayments.

Look at your superannuation funds. Do you have multiple funds? How much do you have in each fund? Do you have any lost super – check via the ATO website.

What about insurance? You’ve probably got some in your super funds, but do you have more life, disability and trauma insurance? What about your home and contents? Or your car.

Once you’ve got all these things listed, we can make a start.

Your cashflow

It’s important to know where your money goes. Every day you’re making a choice – do I spend a dollar today instead of saving it so I have a dollar (plus interest) in the future. We make bad choices (spend today) because we’re not motivated to save for the future.

You may find it easier to begin using cash for a lot of your day to day transactions. I know credit cards are more convenient, but the problem with using credit cards or EFTPOS is that our brains view spending money in this manner as different to cold hard cash! When you hand over $50 to pay for something, you’re aware of the cost. When you pay by credit card, you’re a bit more desensitised to it. This can lead to you spending more money on unnecessary things.

It doesn’t matter how you budget, just find something that works for you and helps you understand where you money is going.

Debts

Walking with debt chain and ball
Does Your Debt Control You?

Debts are an often necessary evil, especially at this stage of life. I’m not anti-debt, but I do believe that you should be in control of your debt, not the other way around.

You should aim to make significant reductions in your personal debt every year. If you have multiple credit cards, loans etc, there may be some benefit in combining them into one to get a lower interest rate, but you still need to repay them.

If your debt controls you, rather than the other way around, it’s time to get help.

Credit cards should be repaid in full every month. If you don’t do this, you’re probably paying an excessive amount of interest.

It’s okay to have debts for investment purposes, but make sure that the actual return is worth the additional risk that you’re taking on.

Protect Yourself

In my opinion, this is the biggest financial issue facing this age group.

I’ve had friends die young from cancer, accidents and other means. I have friends who have been diagnosed with cancer and other serious health conditions and have recovered physically, but are still paying the financial price.

Bottom line : no matter how fit and healthy you are, things can still happen. We’ve all seen that in our friendship groups. So rather than assuming it won’t happen to you, let’s look at what you can do to lessen the impact if something does happen.Insurance Cover

Make sure you have enough life insurance so if you or your partner dies, the financial impact of this is minimised. You probably want enough money to repay all your debts. What about future education costs for your children? Or the loss of your income?

What about income protection? If you were sick and injured, how would you cope without an income for a couple of months? What about a year with no income? Or longer? It’s not a pretty thought. Income protection will pay you up to 75% of your income in the event you can’t work due to sickness or injury. There are certain conditions that need to be met, but this is one of the most important policies you should hold at this stage of life. Your income is everything!

Very few people in this age group hold any trauma insurance. Trauma insurance pays a lump sum in the event you suffer a significant medical condition such as cancer, heart attack or stroke (again, subject to the policy terms). If you were diagnosed with cancer, imagine having a lump sum of money that meant you could pay for any medical treatment you needed. Imagine if there was enough money your partner could take time off work to care for you and not have to worry about how the bills would be paid.

You probably insure your home or your car (at least I hope you do!). But do you insure yourself? Take the time to get good advice and do a thorough analysis of your insurance needs.

Superannuation

I understand that superannuation and investing are not the most exciting of subjects to talk about. But when you’re in your 60’s I assure you you’ll wish you paid more attention to it in your 40’s!

Do you have multiple superannuation funds? Many of my friends do, and usually reveal this fact to me along with a sheepish smile as they say they ‘probably should do something about combining them.’

In many cases, it makes sense to combine your super funds together, but make sure you don’t lose any benefits such as insurance in the process.

Is your super invested in the right places? You shouldn’t be too conservative with it at this stage of your life, but don’t take on an excessive amount of risk that makes you uncomfortable.

Are you contributing to your super? I see many people making contributions in after-tax money when they’d be better off contributing with pre-tax money via a salary sacrifice arrangement. This is an example of when you think you’re doing the right thing, but there’s no immediate pain to cause you to investigate whether there’s a better option.

We help people with multiple super funds get a better understanding of their superannuation options.

Have a plan

iStock_000008515543LargeSo many families in this age group have no long term plans. It’s easy to just exist at this stage in life – go to work, make sure the kids do their homework, taxi the kids to sport etc and then do it all again, all year round!

Goals motivate us to save for the future. If you have something you’re saving for, you’ll start giving things up today in order to save the money for the future goal. But without the goal, you’ll just keep spending.

So set some goals.

  • If you have debt, set some goals around debt reduction.
  • Aim to save a certain amount of money by a particular date.
  • Start saving a small amount for a longer term goal i.e. in 10 years time
  • Set a goal to sort out your super funds, or put some insurance in place

Are You Saving Enough?

There’s a school of thought that says you should save 10% of your income. I don’t believe this is right for most people.

You see, everyone is unique with individual goals and circumstances.

The reality is that even with compulsory superannuation, most of this generation won’t have enough saved for their retirement. So they’ll either work longer, or retire on less income, assuming that they have the choice in this matter and don’t simply find themselves unemployed.

Some people believe that buying a couple of investment properties will be the answer.

My advice is simple – work backwards from your goals. Let’s say you want to retire at age 60 with $1m in capital. Today you may only have $100k invested, so you’re $900k short. What do you need to do to bridge that shortfall, and how much risk are you prepared to take along the way?

The answers to those questions will help determine which investment strategies are appropriate for you.

This is not as complicated as it may seem to be. A few meetings with a good financial planner will help you sort out what you want, and the best ways to get there.

What Should You Do Now?

Are You Unsure What To Do?
Are You Unsure What To Do?

This article has provided a simple summary of things you should be considering at this stage of your life.

It’s really simple to read this, nod your head, and then do nothing different.

I’m challenging you to do something constructive, something that will benefit your family for all the years to come.

  • Start going through these steps and get your financial house in order.
  • Share this article with your partner and friends and talk about your finances and things you’d like to do differently.
  • Get advice if you think you need it. You’ll actually be a lot more motivated to do something if you’re paying someone to help you do it.

Importantly, do something! Take a small step and then watch as that motivates you to take another step, and then another.

We can help. That’s why I’ve written this article – because I’m aware so many people in this generation don’t know what to do, and aren’t particularly motivated to do anything. I believe everyone should have a basic level of financial knowledge, because this is something that affects us all.

Making smart financial choices today will help you achieve the goals in life that are important to you.

About

Allan is a Certified Financial Planner, working at Wise Owl Financial, an Adelaide-based financial planning business. Allan works with people in their 40's and 50's who want to plan for their financial futures. He helps them put in place plans that will enable to them retire when they choose to, with minimal risk of running out of money during their retirement. In his spare time, he love playing guitar, reading and being with his family.

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