I have a particular affinity for 40-somethings, because in addition to having advised them for 20 years, Iâm one of them!
By the time youâre into your 40s, youâve likely developed a particular occupational expertise and are making a decent living. But at the same time, assuming youâve 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, youâre also seeing your household expenses begin to skyrocket.
The top indicator of a financially successful 40-something household, therefore, is an effective cash flow systemâa 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 Iâve seen to help in this endeavor, and I recommend a weekly commitment so you donât get overwhelmed.
- Building emergency cash reserves. There is no shortage of âemergenciesâ that come our way in our 40sâit may be one of the few guarantees of this decade. Yes, itâs 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 monthâs savings. This is a huge and worthy hurdle to leap, because it means youâre 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 youâve automated your savings to reach your goals, you should be able to spend whateverâs 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 childâs life through travel club lacrosse may all be worthy expenditures individually, but collectively theyâre 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 ratiosâideally your total accrued debtâshould be on the decline in your 40s and beyond.
- Planning for spontaneity. Itâs discouraging to feel like weâre restricted financially and canât do anything spontaneously, so instead of leaving those opportunities to chanceâhoping that you can say yes to a fun invitationâuse 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 weâre 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. Weâre prone to âhyperbolic discounting,â which basically means that weâd 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 youâve already started contributing to your 401(k) or other corporate retirement plan, at least up to the companyâs match. This ensures youâre 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 youâre 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. Itâs easier to save tomorrowâs earnings than it is todayâs.
- Opening and funding a 529 plan. If you have kids and you havenât opened a 529 education savings plan yet, consider doing so. Please note that Iâm not suggesting you fully fund your childrenâs 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 âthe talk.â No, not *that* talkâŠbut the education talk. Answer the question, âWhat are you, as parents, going to do for your children for college?â before someone else blabbing at school instills expectations. Establish and communicate a family education policy, and beware the âblank checkâ 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 itâs easy to forget about the portfolio youâve established for the future. While each individualâs portfolio should be customized based on their unique ability, willingness and need to take risk and endure volatility, the following, from my book, âSimple Money,â 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 âgone,â and 2) establish proper levels of life insurance and long-term disability income insurance.