Financial Steps To Take Before 40

So you are about to turn 40. Before you start thinking about a midlife crisis, sports car, golf tour or cruise around the world, let’s take a look at the financial steps you should take before you turn the big 4-0. You’ve probably got about twenty years of work behind you, and perhaps twenty years of work ahead of you. You’re at the mid-point in your working life – which means that the financial decisions you make now are more important than ever before.

So here are our recommendations for financial steps to take before you turn 40.

Create a solid emergency savings fund. Creating an emergency savings fund can prevent you from relying on a credit card and going into debt when unexpected costs strike, says Today show financial editor Jean Chatzky. “You’ve got to watch it with the debt,” she warns. “Lack of savings and debt go hand in hand … an emergency cushion is insurance against debt.”

financial steps to takeYou should have three to six months of your normal income in an account that’s safe and liquid. You should also have in that account savings for planned expenses. For instance, if you know you need to replace something big in a few years, you should be setting aside money for that in your savings account.

 Take out insurance policies. Life insurance is like other types of insurance–car, home, health–in that you pay a monthly premium in case something bad or unexpected happens, in this case a death of an income earner and/or spouse. In short, it means that if you or your spouse dies, you or your children won’t have to deal with financial uncertainty and drastic changes while also dealing with the emotional loss. Your life insurance policy isn’t for you; it’s for other people in your life who depend on you.Clearly, life insurance can’t “replace” a deceased loved one, like car insurance can replace a car. But it can replace—at least partially—the income he or she was contributing to the household, the income you or your children depend on to stay financially secure and enable your family to continue to live a lifestyle close to what you have now.
Meet with a financial planner. While some people prefer to manage their own money, others benefit from a professional’s help. “It’s easy to feel overwhelmed by all of the competing expenses. Sitting down with a financial planner can help you understand where your expenses are and what is discretionary versus essential, and then you can create the right kind of budgeting and savings plan for you.” Watch out for any financial planner who promises extraordinary returns – if it sounds too good to be true, it probably is.
Outperforming the market—that is, getting better investment returns than the market average—is extremely difficult to do consistently, and requires taking a lot of risks with your investments. While some fund managers (paging Warren Buffett) have an aptitude for consistently outperforming the market, it’s a rare planner who can do the same—and results are never guaranteed. Either way, in the pursuit of these high returns, he or she will be exposing your investments to higher risk.
Instead, look for an financial planner who, when looking at your portfolio, can advise on proper asset allocation based on your risk tolerance and time horizon, as well as through economic ups and downs.

Write a will. The single most important financial move you can make if you have minor children is to put the time, effort and money necessary into drafting solid estate planning documents.  They should be written by an lawyer who specializes in estate planning and include advance directives, a durable power of attorney and most importantly, a will.

financial steps to takeA will determines who will take care of your children; who will get your property; and who will wrap up your estate (i.e. the executor). Your health care directive will name a person who can make health care decisions for you if you’re incapacitated, and state what kinds of health care you want to receive (or not).

Setting up these documents takes time and thought, but they’re not typically expensive. Remember, these provisions aren’t for you: They’ll make life easier for the people you love when you’re not around.

What your ideal retirement will cost. Have you ever really crunched the numbers? At 40, retirement — if you’ve planned right — may be a mere 25 years away, so you ought to know how much you need to save up.

Salary sacrificing is when you ask your employer to redirect a portion of your pay as a contribution to super. By ‘sacrificing’ some of your before-tax salary and putting it into your super fund, you get taxed at the special rate of 15%. That’s why it’s also known as ‘concessional contributions’ because there are tax concessions with these types of contributions. This suits higher income earners due to their higher marginal tax rate.
There is a limit on how much you can put into super each year by salary sacrifice.
Most people can contribute up to $30,000, including your employer’s 9.5% super guarantee contribution. This is called the concessional contributions cap.

After-tax contributions are known as ‘non-concessional contributions’ because you don’t receive a tax deduction. After-tax contributions are the simplest way to add to your super as you simply deposit your personal money into your super account.

If you can spare the money, you can really boost your super savings by making after-tax contributions. You will usually save more by investing through super than by investing in the same assets outside super.

financial steps to takeContributions from your after-tax income don’t get taxed when your fund receives them because you have already paid tax. However, there are limits to how much you can contribute to your super before you have to pay tax.

A financial plan. Maybe you prefer to budget in envelopes. Maybe you have a 12-step plan for your retirement (by 40) all mapped out. Whatever you choose,studies have shown that people who think about the future are better able to make their money grow. And sometimes you need someone to help with that.

The financial planners at Altitude Wealth Solutions are experienced, reliable and honest. Contact us today to start your financial partnership with us.