By the time you turn 40, the pace of your life is likely a lot different from what it was when you were fresh out of college in your 20s or getting focused on your life and career in your 30s.
Your biggest concerns now probably revolve around balancing multiple priorities: being a good partner and/or parent, staying on top of tasks at work and chores at home, keeping a close eye on your aging parents and preparing for retirement.
Let’s face it – your plate is full. And though your salary may be higher than it’s ever been in the past, saving money isn’t getting any easier.
Here’s what to do if you need help saving money in your 40s.
1. Pay off high-interest debt
Saving money can be difficult when a big chunk of your pay goes toward bills. Money you could be setting aside for the future is instead needed to cover credit-card, mortgage and possibly car payments. For borrowers, it’s best to prioritize paying off high-interest debt, says Stuart Chamberlin, president and founder of Chamberlin Financial in Boca Raton, Florida.
Chamberlin recommends targeting bad debt – such as credit-card debt – first. Good debt – acquired from the purchase of a home or starting a business – can help increase your net worth or generate income, while bad debt funds things that decrease in value – and it doesn’t help you meet financial goals. Use a calculator and come up with a plan that will allow you to knock out your debt quickly. Make sure your plan involves making more than just the minimum monthly credit card payment.
“Once you get rid of the bad debt and set up a budget, then you can afford to set a certain amount of money aside each month,” Chamberlin says.
2. Set money-saving priorities
Once you knock out high-interest debt, you’ll have to decide which financial tasks to tackle next. You might be considering whether to build up your child’s college fund before buying a house or investing before growing your emergency fund.
Everything can’t be done at once, so prioritize and determine what’s more important while ensuring you’re making smart choices. Paying off your house before saving for retirement, for example, may not be the best idea.
“Accelerating home mortgage payments in lieu of saving into a retirement account is one of the biggest mistakes Americans in their 40s continually make,” says John Hagensen, founder and managing director of Keystone Wealth Partners, based in Chandler, Arizona. “Compound rates of return inside of retirement accounts can be used for income, travel and other living expenses once retired and trump an illiquid pot of money sitting inside the Sheetrock of your home.”
Your top priorities may include paying down your mortgage and saving for your kids’ college, but it’s important first and foremost to have an adequate emergency fund. A well funded emergency fund can help save you from going into debt to cover unexpected expenses such as car repairs or big medical bills, and the best place for it is often a high-yield savings account.
3. Max out employer-sponsored retirement accounts
Not everyone has access to a retirement plan at work. But if you have one, make an effort to max out your contributions.
For 2022, the most you can contribute to a 401(k) and similar employer-sponsored retirement plans is $20,500, which is slightly higher than the limit set in previous years. For those with individual retirement accounts (IRAs), the annual contribution limit on both traditional and Roth IRAs are $6,000.
You’re likely earning more money than you did in your 20s and 30s, and it pays to devote those funds to goals such as retirement.
“It’s tempting to spend that extra money, upgrade (your) lifestyle, but it’s a critical time to save for retirement,” Hagensen says. “(You) still have a long runway until retirement, allowing compound interest to work to your advantage, but often earning salary amounts that allow for sizable savings contributions.”
Unless you work for the government, you probably don’t have a pension that’s being funded largely by your employer. That means it’s up to you to ensure that you’re putting away enough money for retirement and considering the kinds of costs you could end up with when you’re retired, such as significant medical bills.
“In the U.S., we have become nearly a ‘pensionless’ society,” says Andrew McNair, president of SWAN Capital, an independent financial services firm in Pensacola, Florida. “Therefore, the burden of retirement is on your shoulders. We must choose to save now or work late into our 70s.”
4. Save for your children’s college
In addition to saving and preparing for retirement, it’s best to start – or continue – saving for your children’s education. There’s no guarantee that your kids will actually go to college, but with college costs and student debt on the rise, it pays to begin saving years before your child graduates from high school.
One popular way to save for college is a 529 plan, which is available in some form in every U.S. state. The benefits and downsides of investing in 529 plans ultimately depend on where you live and the kind of plan you choose. Earnings grow tax-free and withdrawals may be tax-free, too, if you use the funds for education expenses. In certain states, you may qualify for a state income tax deduction.
Another option is Coverdell Education Savings Account, a custodial account that allows you to save on a tax-deferred basis for your child’s elementary, secondary or college education. You can contribute up to $2,000 each year until your child reaches 18.
Your choices don’t end there. A Roth IRA is worth considering because you can withdraw money penalty-free if it is used to fund cover higher education. Some experts even recommend using the cash value of a life insurance policy to cover college expenses and potentially maximize the amount of student aid your child can receive.
“Let’s say you’re qualifying for student aid. Life insurance does not go on the financial disclosure document when qualifying for financial aid, unlike a 529 plan, which could hinder a child based off of the asset side of the balance sheet of the parent to have the ability to qualify for various aid,” says Andrew Whalen, CEO of Whalen Financial in Las Vegas.
5. Consider flexible spending accounts
A flexible spending account (FSA) is another benefit offered by some employers. Not to be confused with health savings accounts (HSAs), FSAs allow employees to put money away in advance for designated health-care costs.
Contributions to FSAs are made through payroll deductions, and a portion of the money you set aside for the year is taken out of your paycheck before it hits your checking account. These contributions are considered pretax dollars and reduce the amount of income subject to taxation.
For 2022, you can contribute up to $2,750 for health-care expenses, including:
- Medical services, treatments and supplies
- Over-the-counter drugs and medications
- Vision expenses such as glasses and contacts
- Dental care
Families may also want to consider a dependent care FSA, which covers the cost of child care and after-school programs using pretax dollars.
A potential downside to health-care and dependent-care FSAs is you can lose any money contributed but didn’t spend by year-end. A grace period could apply, giving you more time to use the remaining funds, so check with your benefits provider or human-resources department for plan details.
