6 ways to navigate your finances in your 40s
Growing responsibilities and competing priorities can be a feature of your 40s. Strategic wealth advisor Adrian Hanrahan offers his tips for getting ahead in mid-life.
Although marriage, mortgage, and young children may have characterised your 30s, your 40s often feature growing responsibilities and ever-competing priorities. Your parents are older, your mortgage is still on foot, children’s education costs are growing, and though retirement may seem a distant reality, planning for that reality becomes an important consideration.
The good news is that in your 40s, the financial planning you undertook in your 30s begins to come to fruition. Perhaps even better news for many is that it’s still not too late to start this planning in your 40s if you haven’t already done so.
Getting organised and keeping your finances fit
A common goal across all age brackets is to organise and optimise your financial affairs. Everyone needs a financial plan, and all plans should be in writing so as to be measurable and accountable.
At a minimum, your financial plan should encompass your current circumstances, such as specific financial goals, budgeting, emergency funds, cash flow, as well as your road map for achieving these objectives. This road map should cover both wealth-accumulation strategies – that is, growing your investments – and wealth-preservation strategies, which can include using appropriately structured life and income insurance as well as appropriate legal documentation should something happen to your health, life, or family situation.
Once you have this plan in place, you need to regularly review it and adjust it when changing laws and circumstances dictate.
Maximising your cash despite vying priorities
Do you have a budget? In your 40s, you should have a family budget that you also regularly review. Simply writing down and ranking your key priorities, then allocating the cash flow accordingly, can bring valuable clarity and simplicity to your budgeting.
Often, you don’t need to earn more to improve your cash flow; you just need to better manage the money that passes through your hands. Depending on your marginal rate of tax, a dollar saved can almost be worth as much as $2 earned.
Affording education costs
Everyone wants the best for their children, which for some families may include offering them an education in the private system. There’s no set strategy that’s best for funding education that will work for everyone. But some issues to consider include your:
- Income and marginal rate of tax;
- capacity to save;
- investment experience and tolerance to risk.
A few funding options may include:
- Prepaying school fees when discounts are available.
- Making extra mortgage repayments or having this money sit in an offset account. This provides you with a cash reserve to draw on in the future, assuming you have the discipline to leave this money untouched in the meantime.
- Investing in insurance bonds. These are similar to managed funds, the difference being that the tax is paid internally up to 30 per cent instead of by the investor. This structure can be capital-gains-tax-free if you hold it for more than 10 years. This is an option when your marginal tax rate is greater than 30 per cent and you have a long-term timeframe.
- Investing in education bonds. These bonds are similar to insurance bonds, but they specifically target education expenses and provide additional tax benefits.
- A combination of the above.
Paying off your mortgage faster
In your 40s, with luck, you’ve left behind the credit card debt and personal loans from your 20s and 30s. After all, these days, you’ve got enough to juggle and should be dealing with only one non-deductible debt. For everything else, don’t buy it if you can’t afford it (this includes upgrading to a bigger house that you really can’t afford). There are a few techniques for accelerating the repayment of your mortgage and saving thousands of dollars of interest over the life of the loan:
- Consolidating your debt;
- finding a loan with a great rate;
- making extra repayments;
- making repayments fortnightly;
- efficiently using a mortgage offset account;
- a combination of the above.
Using superannuation effectively
Although superannuation is an important vehicle for your retirement wealth, if you’re in your 40s and more than 10 to 15 years away from retirement, it’s generally better to use your surplus cash flow for the repayment of non-deductible debt instead of additional pre-tax super contributions. Within 10 years of retirement, it’s typically better to flip this strategy and focus on maximising superannuation contributions with your surplus cash flow.
Although you might not be maximising your pre-tax super contribution limits in your 40s, this doesn’t mean you can neglect this important vehicle altogether. Open, read, and understand your super statements. Consider consolidating your super, reviewing your asset allocation in line with your objectives and risk tolerance, and know what you pay in super fees. Make sure you don’t lose valuable insurance cover when switching or consolidating super funds before considering your wealth protection requirements.
You’ll likely have 15 to 20 years until retirement and more than 25 years beyond, so don’t hold this money too conservatively. Conversely, don’t take unnecessary risk to achieve your objectives.
Growing and accelerating your wealth
Given Australia’s ever-changing superannuation rules, it’s a good idea to have some investments outside of this retirement vehicle. These investments can provide you with the flexibility of a retirement before the superannuation preservation age (the age at which you can access those funds).
You can grow your personal wealth either from your own cash flow (after tax savings) or by borrowing money to invest. It may be appropriate to consider your wealth accumulation and debt management strategies together (that is, a debt recycling strategy). A well-constructed portfolio is one that takes into account your objectives and personal circumstances. It should be well diversified and should focus on performance.
If you’re unsure where to start, seek advice from a financial planner who’s independent of the investment opportunity.
Navigating your 40s and your finances can be a challenging combination, but with some help and careful financial planning, you can achieve your financial goals and live the life you want.
A financial planner can work with you to develop a financial plan for the future.
Adrian Hanrahan® is a strategic wealth adviser with Australian Unity Personal Financial Services Ltd, ABN 26 098 725 145, AFSL 234459.
This article contains general financial advice only. It is provided by an Australian Financial Services licensee (AFS licensee) or the employee or authorised representative of an AFS licensee as identified in the article. General financial advice does not take into account your objectives, financial situation or needs, and you should consider seeking professional financial advice before acting on the general advice provided.