Have you ever heard someone older than you talk about their finances and think, Wow! They have it all together!
Chances are they didn’t get there by sitting back and doing nothing. Financial stability requires fiscal responsibility. You might get away with living life like there’s no tomorrow during your 20s, but if you aspire to be financially secure beyond the age of 40, there are a few goals you should aim to reach in the years leading up to it.
These goals will set you up for a financially steady future, but they are not short-term plans. Accomplishing the following five financial goals before you turn 40 may take years. Here’s what you need to think about now:
1. Learning How to Save Money
When you read that a recommended financial goal is to learn how to save money, you may think you already know how. How hard could it be to put some extra money into a separate account? But the truth is: Knowing there is money readily available and not spending it can be a real challenge. There are a few tricks to make saving money easier.
Setting up an automatic deduction from your direct deposit paycheck is a great way to save money. It’s easier than putting aside the money on your own, because you don’t have to think about what you could purchase with that money now. You can set up your automatic deduction as a percentage of your paycheck or a specific dollar amount. By putting the pre-determined amount into a high yield savings account, you can gain interest on top of what you are setting aside.
You can also use some savings accounts for specific purposes. A 529 college savings plan, for example, is intended only to be used for educational purposes. It’s an investment account with tax benefits that can pay for private school tuition throughout childhood, college tuition, and even repaying student loans. Of course, if your child does not go to college or gets a scholarship, that money is not gone. To withdraw from a 529 plan for non-educational use, you must pay income tax and a penalty.
Withdrawing from a savings account is not usually the goal—unless you’re saving for something of value. Although you may have to start living more frugally, learning to save is a financial goal worth aiming for. Whether you save up for a new car, a down payment on a home, or start an emergency fund, you will be better off in your 40s with the skill of saving.
2. Building an Emergency Fund
If you were to lose your job today, would you be able to cover all of your expenses over the next few months?
An emergency fund is necessary for anyone, but is a crucial financial goal for those coming up on 40. For many people, when an emergency strikes, a credit card comes out. Although this might be okay at the moment, paying off that charge and the interest that comes with it can be a real challenge—and a serious setback.
Rather than relying on credit for emergencies, an emergency fund can save you the trouble of paying more than you need to. It can take time to build up a good amount. Most experts suggest a fund that covers three to six months of expenses. The average monthly expenses for a family of three in the United States is approximately $6,178. This means, at minimum, your emergency fund should total over $18,500. If you choose to cover six months, you would want a fund of about $37,000.
Developing this type of fund can be incredibly challenging—especially if you already struggle financially. But don’t let that stop you in your tracks. Remember: Every bit helps. Start with whatever you can and build up to $1,000. Though it may not seem like a lot, $1,000 can cover many unexpected expenses.
3. Starting a Retirement Fund
Many young people don’t see the value in adding to a retirement fund. After all, 65 is a long way away when you’re in your 20s. But starting early is the key to success. The earlier you start building a retirement fund, the longer it has to earn interest. Experts say that by the age of 40, you should already have three times your annual salary in a retirement account.
Retirement accounts come in a few different shapes and sizes. There are employer-sponsored retirement plans, like a 401k or a 403b. Individual retirement accounts include the traditional or Roth IRA, which is similar in some ways. The differences can seem confusing at first, but there is a simple distinction. A 401k is for employees to contribute on a pre-tax basis, and some employers offer to match the employee’s contributions. A 403b is similar except for non-profit organizations.
A traditional IRA is for people to supplement their retirement accounts on their own. There is no employer involvement. A Roth IRA is similar, less the cap on income levels and the ability to withdraw from the account prior to retirement without a penalty.
Experts recommend contributing 10 percent of your income to retirement before you turn 40. But like building an emergency fund, anything is better than nothing. If you can’t afford more than 6 percent, that’s fine. The most important thing is that you’re making progress—even if it’s slow and steady.
4. Purchasing a Home
Purchasing a home is a financial goal many people strive to reach. If you think about your age when buying a home, you may realize that you could be paying it off while you’re retired. No one wants their retirement fund to go towards the mortgage. By purchasing a home before you’re 40, you can have it paid off before you retire.
A real payoff time is anywhere from 15 to 30 years. If you were to purchase a home at the age of 30, you would pay off your home before 60 years old. Of course, this only counts if you don’t take out a second mortgage on your home. For this reason, it’s essential to purchase a home you can afford and plan to stay in.
Living in a home for a long time is beneficial, because it is an appreciating asset. Although it can be tempting to purchase a new—or more expensive—home when you’ve paid off the mortgage on your first, it’s not always in your best interest. The point of this financial goal is to live comfortably when you no longer work for your income.
5. Learning the Ins and Outs of Investing
Investing is a polarizing topic—people tend to be very interested or not interested at all. Of course, most people want to make extra money off stocks, but many people simply don’t know where to begin. This leads to avoidance.
Make it a financial goal to grasp investments fully. There are a number of investment options available to you—stocks, bonds, and mutual funds are some common options that you can start to learn about—and knowing a bit beyond the basics can help you select suitable investment options for you and your future.
Reaching Financial Goals by 40
Throughout your early working life, you may think there is no need to set financial goals beyond immediate needs. After all, the easiest path is simply coasting through. But reaching financial goals before you turn 40 will prepare you for the rest of your life.
There is no need to live stressed and financially strapped forever. And things like buying a home or investing aren’t just for the privileged. If you practice financial responsibility now, you’ll be better equipped to reach the necessary goals to live freely later.