Financial planning at any age: your 40s

As you reach and travel through your 40s, your financial outlook begins to look very different than the landscape of your 20s or even 30s. That’s because retirement, while still a ways off, is no longer such a distant concept. While each individual’s life situation differs, the needs of family members—potentially including teens or adult children—may factor into the mix. 

Let’s address the elephant in the room first—it’s never too late to learn, use, and master personal financial planning, even if you’re just now exploring it in your 40s. So, what is financial planning? It’s simply defining where you currently are financially and where you’d like to be in the future while figuring out a plan to bring those two points together as soon as possible. 

While that answer is easy, the actual practice of planning will be a little more complex. It all starts with taking a thorough, honest look at the state of all of your accounts, income and debt alike. 

Know where you stand financially

What are your assets? Some are easy to write down—your house, your car, and what’s currently in your checking and savings accounts. Some points of data are a bit more elusive, particularly if they aren’t easily liquidated. Valuable belongings you’d be willing to sell, stock portfolios, and bonds are a few examples. These all take time and effort to turn into liquid, spendable money. 

The goal of determining the value you have at your disposal isn’t necessarily to stick a price tag on everything you own. It’s more of a smart periodic exercise to better understand your entire financial picture, including what you could sell if you wanted to in a pinch. Whether you sell it, put it up as lending collateral, or never touch it, it’s better to be as informed as possible on your financial status with your assets.

Once you’ve accounted for your possessions and income, ask yourself these questions to help further refine that information:

• Can my current income keep up with my current quality of life and spending habits?

• Am I spending my paychecks as soon as they clear? (e.g. living “hand to mouth?”)

• Do I have any financial safety net or cushion in place if something happens?

• How quickly can I access my assets in an emergency situation?

If any of these questions conjure up a blank stare, that’s a sign that you’ll need to do some information gathering as part of financial planning in your 40s. Remember, the measure of financial success isn’t strictly a bank account that doesn’t dip into negative numbers. It’s knowing why your account is stable and how to keep it going strong.

Create a budget

The dreaded “B” word, scourge of Starbucks habits, and ruiner of fun…right? Thankfully,  a budget doesn't have to be a headache if you approach it with your lifestyle firmly in mind. Essentially, a budget shouldn’t feel like an uncomfortable restriction; it should feel like a familiar old friend reminding you of something important. In other words, it’s there to help, so treat it accordingly.

Start by making a list of everything you need in a month. Yes, that means everything, including that aforementioned latte habit, your favorite streaming services, and even gas for your car. A realistic budget needs to be an honest snapshot of the way you live your life, and that means even the splurges and potentially irresponsible spending habits. 

Once you’ve tallied up your recurring charges, your favorite expenditures, and a realistic budget for things like groceries, figure out how that total sum looks in comparison to your income. If it’s a positive difference, great! Set that money aside for savings and keep moving forward. If it’s a deficit, however, know that you’re in very good company.

If your monetary needs are more than you’re earning to survive day-to-day, you’ll need to critically examine your expenses. Bear in mind that this doesn’t necessarily mean cutting out the things you love and look forward to- rather that you’ll need to be smart with them. Personal financial planning shouldn’t feel like a dreaded chore.

• If memberships are looming large in your figures: Can you save money by paying several months’ of fees at once? Routine and habits are likely a very familiar part of your life in your 40s, but that doesn’t mean you should throw good money after bad.

• If shoes and clothes are dragging down the budget: Have you sold or consigned the clothes and shoes you no longer wear? As work fashions and general trends change over the years, it’s easy for a closet to end up packed with unwanted or unneeded clothing, even designer labels.

• If recurring bills are taking a bite out of your income: Figure out the reason why. Make sure things like utility bills are in line with your neighbors’ bills. Figure out if you’re being overcharged for things like home maintenance, service calls, and even car repairs and oil changes. Don’t assume you’re getting the best deal just because you’ve been using the same provider for years. 

Part of financial planning for 40-year-olds involves facing the uncomfortable truth that you’ve likely been overpaying for at least one or two things, potentially for a while. Treat your money like it deserves: with diligence, respect, and a cautious eye out for ongoing financial harmony. 

Set financial goals for your 40s

If there was ever a time to be precise in your financial planning, it’s in your 40s. The goal shouldn’t be to simply “go on vacation." It should specifically be to “take a 10 day vacation to Greece in the next 2 years.” Planning experts tell us to make goals SMART—Specific, Measurable, Achievable, Realistic and Timely—and that goes double for anything money-related. Because at the end of the day, what is financial planning if not a tool to help us live our best lives?

In addition to fun, lifestyle-related goals, financial opportunities should definitely be on your radar in your 40s. Some examples you may want to include in your financial planning are:

• Pay down high-interest debt. Figure out the Annual Percentage Rates (APR) for each of your open credit accounts and loans, and order them from highest to lowest. This is the order that money could be applied to your debts, as this tactic will minimize the amount you pay in interest over time. If possible, look into a consolidation loan to bring your debts together under a low-interest umbrella with a single periodic payment. Wondering what approach to debt works best for you? Compare how the snowball vs. avalanche methods may be useful when it comes to paying down debt.

• Arrange your taxes to benefit you. This task is best completed with the help of a certified public accountant, but in general, you’ll tuck as much of your income away—and out of government hands—as possible. You can max out tax-liability-reducing contributions to retirement accounts like your 401K each year, and repeat this process with any HSA (health savings accounts) that may be tied to your health insurance. This can help lower your overall tax liability and hopefully your tax bracket in the process.

• Set aside money for your child(ren). Tax-free account contributions to specific college savings plans can help reduce your annual income on paper while providing for your loved ones. Now can be an excellent time to start if you haven’t already, particularly if your child or children is currently in their teens or younger. Once again, if you’re able to, you can max out contributions to this account each year to reduce your personal tax liability.

• Look into life insurance and set up a will. Money matters have a way of getting difficult and entangled in the event of an unexpected passing. Just in case, make sure the assets you're working so hard to grow and preserve go where you intend them to with solid paperwork. Communicate policy information to your beneficiaries, or communicate where to find that information if anything should happen. If you aren't sure how to set up a will, research legal services in your area that provide assistance with understanding, completing, and filing them. 

Protect what you have

Now that you’ve accounted for your income and debts and have assembled a road map to where you want to be, it’s time to protect your financial journey. Making smart 40-year-old financial plans means ensuring that hard-earned money will be available for another 40 years and beyond. Here are three ways to make sure your account doesn't spring an unexpected leak.

• Make sure you’re staying on task. That means no dipping into your savings for splurges or non-emergencies. Limit temptation by making it difficult to pull out money in the spur of the moment. It may be helpful to store your savings account information somewhere that’s hard to access immediately but still available, such as a safe deposit box or safe. Avoid the temptation to keep cash around, as this increases the chance of theft and keeps you from earning money on savings account interest. 

• Keep an eye on your finances. Keep meticulous financial records, both physical and digital copies. These will help you spot fraudulent charges quickly, rather than having them pop up as unpleasant surprises months later. Enable two-factor authentication on all of your financial accounts, and use a bank with a robust online presence, including an app, for up-to-the-minute updates on your account statuses.

• Don't make yourself an easy target. In a similar vein, don’t leave your banking account information anywhere where it might be discovered, including account numbers, passwords and checks. Digital bank accounts are a safe option, provided that you change your passwords frequently, enable two-factor authentication and review your account statements regularly. 

Put an estate plan in place

When it comes to your money, the old adage applies: hope for the best, but plan for the worst. Financial planning for 40-year-olds might look a little more stable than those with less life experience, but that doesn't mean you're immune to unpleasant surprises. Know your plan of action if you become injured or unexpectedly lose your job. 

While a loss of income is difficult in the best of circumstances, not having a contingency plan can be even worse. You can’t always rely on workers compensation or unemployment insurance alone to cover your bills if you experience a major upheaval. Continue filling your savings account where you're able and take advantage of supplementary injury insurance through work, if available.

And finally, make sure you're working with a bank that's flexible enough to meet your needs, with access to your account balances and the ability to make changes from your smartphone. Varo Bank offers both bank and savings accounts with no hidden fees, free withdrawals from a network of more than 40,000 U.S.-based AllPoint® ATMs, and robust account features.¹ If you're tired of dealing with banks that work you over instead of working with you, it's time to switch to a bank that's ready to help you earn and save through your 40s, 50s, and beyond.