The Big Financial Choices You’ll Face (In Your 40s)

Congratulations!

Here you are, in your 40s. You’ve bought your house a while back and focused on paying that mortgage down.

And now you find yourself having paid down most of your mortgage. Maybe there’s still some owing - around $200,000 remaining tends to be an average if you’d bought your first place in Melbourne 8-10 years ago.

You're probably also earning a comfortable income, might have a few kids and all the scheduling that comes with that.

If you’re not quite there yet, no doubt you’re on the cusp of feeling comfortable.

And, if you’re like most of the people we work with, you might be starting to wonder – what now?

Of course, that feeling can encompass a lot of the different parts of life – career, family, self, all the big things!

But I’m a financial planner, so let’s stay in my comfort zone and talk about money.

Specifically – now that you’ve made such solid progress and your hard work is translating into comfort and security for you and your family, what should you be doing with your money, now?

Because where you are now is a great place to be in life, but it's also a pivotal point where financial decisions can significantly impact your future.

So, let's dive into some smart financial choices you can make in your 40s.

1.       Emergency Fund.

First things first – if you haven’t already, start building a robust emergency fund. Life can throw curveballs, and nothing beats having cash in the bank for giving you that peace of mind when things go wrong.

How much? Well, that’s really up to you and your circumstances, but I’ve never met anybody who regretted having at least six months' worth of living expenses saved up.

2.       Keep Paying Off That Mortgage:

You might have seen a chart that shows how the principal and interest on your loan works over the long-term. If not, check this calculator out.

Essentially, the first 8-10 years of the loan are hard graft, where most of your monthly repayments are going on the interest component.

But then, over time, the share of your repayment going towards the principal starts to grow.

And when that happens, the balance tilts and you start running downhill – each month paying more off the principal, which reduces the interest component next month, leaving more to go on the principal, and so on in a wonderful snowball effect.

Well, you’re within sight of that summit by now – if not already comfortably camped up there.

So maintain your momentum and keep making those payments.

Should you keep paying extra? Well, that’s a big question that I can’t answer here – but maybe.  

3.       Family Budget:

If you haven’t already, sit down (with your spouse if you have one) and create a family budget.

This will help you align your financial goals and ensure you're both on the same page.

I like to use ratios to define your budget – where you allocate:

-          40% of your income to your Needs (core expenses you need to live)

-          30% towards Wants (discretionary stuff that makes life more fun)

-          30% towards Worries (think the boring stuff like insurance, house maintenance, savings and investments.  

This keeps it simple and helps ensure you’re putting some of today’s money away for tomorrow.

4.       Keep an Eye on Lifestyle Inflation:

One downside of the ratio approach is that, as your income grows, it doesn’t help you avoid the inexorable increase in lifestyle expenses.

Because it's really easy to succumb to lifestyle inflation. So, be mindful of your spending and continue to live below your means to build wealth effectively.

5.       Prioritize Retirement Savings:

While it may not seem urgent, your 40s are an ideal time to boost your retirement savings. I’m sure retirement feels like it’s ages away – and it is – but the sooner you start, the bigger the impact.

Even starting with something small – a few dollars as a salary sacrifice, or a few dollars a month after-tax – can make a huge difference by the time 62-year-old-you is sick of working.

With your income, you can contribute significantly and benefit from tax advantages while securing your retirement future.

Now – obligatory disclaimer here: consider getting financial advice before doing anything in this space, because there can be risks and trade-offs to consider before locking anything in.

6.       Education Expenses:

You might have already hopped aboard the hyper-inflation train of Melbourne private school fees – or maybe you’re still waiting for it to get to your station.

Either way, if you’re planning on sending your kids to a private school, it’ll be a lot easier if you’ve got a plan in place.

There are some pretty good products in the market now to help you build up a nest egg to cover the costs of their education – from the fees themselves, to the camps, books, uniforms and myriad other outgoings that pop up.

Like with most financial matters – a little bit, earlier can have a much bigger impact than a lot more, later.

7.       Start investing outside of super too

Related to the prior point, this stage of life is all about pursuing (but probably never quite achieving!) balance.

Work/life/family/friends/self/health/wealth/all the other things weighing on your mind – getting these into balance is the mystery nobody has really solved yet.

Another area to balance is your approach to investing. Say you had 100 coins to invest.

You could:

-          Put all 100 on the mortgage.

-          Put all 100 into your super.

-          Put all 100 into the education fund.

-          Put all 100 into an investment of some sort.

-          Put all 100 into lifestyle and enjoyment.

And each option – appealing though they may seem – comes with downsides, upsides, risks and trade-offs (our DURT framework).

A better approach, normally, is to split your coins across all these buckets. But in what ratio? How much to tip into each?

Well, that’s where personal financial advice comes in. But remember that investing out of super, and beyond your house, in your 40s is probably a really good idea. Your 40s are a sweet spot for long-term investments, with enough time to ride out market fluctuations.

8.       Diversify Income Streams:

Similar to the above, where diversifying your capital allocations is a good idea, diversifying your income is a good idea too.

Explore opportunities for diversifying your income. This could include investing in something (property, maybe, or shares, or something different), starting a side business, or developing passive income sources.

This will feel like a lot of work, but extra income at this point effectively lifts the ceiling of your future lifestyle – so it might be an investment worth making.

9.       Be Conscious Of, But Not Obsessed By, Tax:

Look, I’m not going to lie – as you earn more money, the amount of tax you’ll see on your Notice of Assessment each year is probably going to annoy you. You’ll probably think “what a damned waste – better off in my pocket!”.

This is a natural reaction.

But move on as quickly as possible. Paying tax means two things – first, that you’ve made money and second, that you’ve covered the cost of living in Australia, with all the benefits and advantages that means.

Which isn’t to say pay more tax than you need to – now is a great time to get advice on ways you can tax-effectively structure your arrangements. Just don’t become one of those people that’s obsessed with how much tax they’re paying. I’ve seen people go slowly broke chasing ‘tax deductions’ in their manic desire to avoid ‘paying too much’.

No, don’t obsess about it – but be smart about it at the same time. Again – balance…

Maybe there’s a packaging option through work that can reduce your taxable income.

Perhaps a salary sacrifice structure would be really good for you.

There are different tax structures for different investments that might be good for you.

If you’re self-employed, well there’s a smorgasbord of tax planning options in front of you.

Oh, and please seek advice before you sell any assets! Otherwise you’ll probably end up paying more tax than you need to!

10.   Health and Wellness:

There’s a financial angle to looking after your health - medical expenses and time away from work can take a toll on your finances.

So invest in a healthy lifestyle and look after yourself.

But don’t just do it for the financial side – do it to look after yourself. You’re worth it, people rely on you and doing right by you will help you be there, and be better. For longer.

And you’ll save some cash too.

11.   Plan for Your Own Education:

Don't forget about your own personal and professional development.

Your 40s are a classic time for a bit of self-reflection and – maybe – even some disappointment.

Don’t wallow in that, and be wary of stagnation.

To avoid getting stuck in that mindset, consider investing in courses or certifications in areas that interest you AND that could boost your career and earning potential.

12.   Teach Your Kids About Money:

I have another big post coming out soon about this very topic, because I believe it’s absolutely vital that we start educating our kids about money management.

Nobody else is going to do it, and frankly the people that are offering normally have an agenda they’re pursuing (look into the Dollarmites programme for more detail on this).

And nobody really profits from kids learning the basics - saving, budgeting, discipline and rationality don’t fatten anybody’s bottom lines.

But teaching them these things early on can set them up for financial success, and keep them away from the financial mistakes we’ve all seen people make.

13.   Reevaluate Your Home:

Take a look at your current home. Does it still meet your needs as your family grows?

If necessary, consider making a change.

At this point, you might be looking at upgrading – a lot of people do. It can be a wonderful move, but there are always financial and personal downsides to consider, so tread carefully.

14.   Estate Planning:

Now's the time to get your estate in order.

Draft a will, set up trusts if needed, and review beneficiaries on insurance policies, investment and superannuation accounts.

A common sticking point is choosing a guardian for your children in the event you both pass away. I’ve found this course can help you work through the specifics and make such a big decision.

15.   Review Your Insurance:

This is not a particularly fun – or cheap – job.

Life insurance in Australia has been getting progressively more expensive in recent years. There’s not much we can do about that (although, at a macro level – if we have a huge influx of new lives into the insurance pool, that’d help).

But when you think about the financial impact for you and your family in the event of your death, disability or serious illness, there’s no alternative for most people.

So arrange a review of your insurance coverage. And pay the premiums you can afford to pay.

Your family's financial security depends on it.

16.   Financial Advisor:

Most of the things on this list, you can do yourself. You can Google the information, learn the details and implement the different steps.

And if you can, you should. It’ll save you money and leave you in control of your situation.

But for most people, consulting with a financial adviser can be a great decision.

Maybe it’s a one-off engagement to help get everything cleaned up for you. Maybe it’s a long-term, ongoing relationship with somebody that will keep you on track.

Or maybe you’d just like somebody who can help you create a comprehensive financial plan tailored to your goals and risk tolerance.

Either way, engaging a professional to help you can be a fantastic way to leap ahead a few places in the process.

17.   Enjoy Life:

Finally, remember that while financial planning is crucial, life is meant to be enjoyed.

Find a balance between saving for the future and enjoying the present. Budget for holidays and experiences that create lasting memories with your family.

I’ve known people over my career that were just obsessed with squeezing every dollar out of life. Beyond mere stinginess, these are people that create complexity in their lives because it’ll save $100 a year in tax.

No, thank you. Pay the $100 and invest the 4 hours you’ve gotten back in something that matters.

Like walking the dog. Smelling those roses. Hugging the kids.

Money’s the means to the end, not the end itself. So enjoy yourself along the way!

In your 40s, you're in a prime position to make smart financial moves that will set the stage for a comfortable retirement and a secure future for your family.

Prioritize your financial goals, stay disciplined, and seek professional advice when needed.

With the right strategies and good decisions, you can navigate the complexities of your financial life with confidence and peace of mind.