I have a particular affinity for 40-somethings, because in addition to having advised them for 20 years, Iâ€™m one of them!
By the time youâ€™re into your 40s, youâ€™ve likely developed a particular occupational expertise and are making a decent living. But at the same time, assuming youâ€™ve taken that well-traveled path and accumulated a house, spouse, 2.5 kids, a Labradoodle and the proverbial white picket fence as part of your individual narrative, youâ€™re also seeing your household expenses begin to skyrocket.
The top indicator of a financially successful 40-something household, therefore, is an effective cash flow systemâ€”a customized method for handling finite inflows and seemingly limitless outflows.
Plan for the present through cash flow management by:
- Developing a budgeting system and rhythm. YouNeedABudget.com is the best app/software system Iâ€™ve seen to help in this endeavor, and I recommend a weekly commitment so you donâ€™t get overwhelmed.
- Building emergency cash reserves. There is no shortage of â€śemergenciesâ€ť that come our way in our 40sâ€”it may be one of the few guarantees of this decade. Yes, itâ€™s ideal if you can have three months of household expenses in emergency cash, but to get to that amount you have to start with one monthâ€™s savings. This is a huge and worthy hurdle to leap, because it means youâ€™re not living paycheck-to-paycheck anymore. A great way to get a head start is to kick this effort off with a lump-sum infusion, like a tax refund or bonus that may be coming this time of year.
- Automating savings. Whether your goal is to have three months of cash or to save up for a home down payment, the best way to get there is to automate your savings. Once youâ€™ve automated your savings to reach your goals, you should be able to spend whateverâ€™s left guilt-free.
- Picking your battles. You could never have enough income, it seems, to out-earn the demands on your paycheck in your 40s, so picking your battles is necessary. Yes, saving for college, taking a trip to Disney or an excursion to Washington D.C., and enriching your childâ€™s life through travel club lacrosse may all be worthy expenditures individually, but collectively theyâ€™re likely to break the budget, and neither you nor your kids are better off then.
- Paying down high-interest debt. A battle we must choose for the sake of both our financial present and future involves paying off high-interest debt. Your debt-to-equity and debt-to-income ratiosâ€”ideally your total accrued debtâ€”should be on the decline in your 40s and beyond.
- Planning for spontaneity. Itâ€™s discouraging to feel like weâ€™re restricted financially and canâ€™t do anything spontaneously, so instead of leaving those opportunities to chanceâ€”hoping that you can say yes to a fun invitationâ€”use your budgeting process to pre-fund spontaneity by, for example, using a date night and/or buffer category.
- Finding a cause and giving to it. This might sound counterintuitive, but studies show that weâ€™re biologically wired to give. In addition to the endorphin rush in the moment, giving to someone with less tends to make us feel like we have more. That benefit (for both parties) is compounded when this is a personal interaction, not just financial.
Unfortunately, our biology works against us when it comes to planning for the future. Weâ€™re prone to â€śhyperbolic discounting,â€ť which basically means that weâ€™d much rather spend our cash today than wait to spend it in the future. The further into the future that prospective expenditure is, the more we discount the future joy it might bring.
For more help on approaching cash flow management, consider the following:
Plan for the future through foresight and discipline by:
- Auto-escalating retirement savings. Hopefully youâ€™ve already started contributing to your 401(k) or other corporate retirement plan, at least up to the companyâ€™s match. This ensures youâ€™re getting all the free money on the table, which helps to significantly boost the compounding of your retirement savings. But are you actually saving enough to be on track for financial independence at a reasonable retirement age? The research suggests youâ€™re not. While you might successfully tighten your belt and deprive yourself today for the benefit of tomorrow, a generally less painful route is to select an auto-escalation to your retirement savings. Each year (hopefully you get a raise), your savings rate increases. Itâ€™s easier to save tomorrowâ€™s earnings than it is todayâ€™s.
- Opening and funding a 529 plan. If you have kids and you havenâ€™t opened a 529 education savings plan yet, consider doing so. Please note that Iâ€™m not suggesting you fully fund your childrenâ€™s future education expenses in a 529 plan (however ideal that might be), but that you at least put a dent in such an effort. Additionally, consider informing well-meaning relatives about the existence of these accounts with the implicit invitation to help fund them with gifts around birthdays and holidays.
- Having â€śthe talk.â€ť No, not *that* talkâ€¦but the education talk. Answer the question, â€śWhat are you, as parents, going to do for your children for college?â€ť before someone else blabbing at school instills expectations. Establish and communicate a family education policy, and beware the â€śblank checkâ€ť promise that is currently risking to cripple a generation of well-meaning parents.
- Paying attention to your portfolio. Life is so busy in your 40s, and the expenses are so many (and so seemingly urgent), that itâ€™s easy to forget about the portfolio youâ€™ve established for the future. While each individualâ€™s portfolio should be customized based on their unique ability, willingness and need to take risk and endure volatility, the following, from my book, â€śSimple Money,â€ť is a general starting point that may be appropriate for 40-somethings. It tilts toward equity exposure and especially small company stocks, value company stocks and international company stocks.
For more resources on retirement planning, investing and education planning, consider the following:
In addition to these savings, investment and retirement goals, two of the most important financial planning recommendations I have for those in their 40s are to 1) draft estate planning documents (a will, durable powers of attorney and advance directives), which, among other things, help determine who would be the guardians of your children if Mom and Dad are tragically â€śgone,â€ť and 2) establish proper levels of life insurance and long-term disability income insurance.