If you're in your 40s, you could be considered either a "late baby boomer" or member of "Generation X." Either way, you're at a time in your life when you're putting youth aside and should be doing some financial planning for your future and your family's future.
A dilemma faced by people in their 40s is that they typically need to be saving for college tuition for their kids and putting money into a retirement account while simultaneously buying a house or saving for a down payment. Financial experts can help you sort out where your savings should be going in your 40s.
"Not having a financial plan is actually just having a really bad plan," says Alexa von Tobel, founder and CEO of LearnVest.com in New York. "Every financial plan is specific to the individual, but you should look at your income and set priorities for paying off debt and saving for different needs."
These financial planning tips are meant to help 40-somethings find balance in their hectic lives of spending and debt.
1. Build up your reserves
Roy Laux, president of Synergy Financial Services in McKeesport, Pa., says the first step in any financial planning is to establish an emergency fund.
"You should have three to six months' of your normal income in an account that's safe and liquid," Laux says. "You should also have in that account savings for planned expenses. For instance, if you know you need to replace your furnace in a few years, you should be setting aside money for that in your savings account."
Ronya Corey, a financial adviser with Merrill Lynch Wealth Management in Washington, D.C., says that two-income households may be safe enough with three months' of expenses saved, while a single person might need six months' of reserves.
"There's no right or wrong answer about how much cash to have, but you need to be prepared in case your roof needs replacing or if you lose your job," Corey says.
2. Reduce your debt
If you have credit card debt, student loan debt or medical bills, your next priority should be to reduce and eventually eliminate that debt so that your income can be channeled into saving and investing for the future.
"If you have credit card debt, you need to work on paying that down as quickly as you can," Corey says. "If you have student loan debt, then you should first look to see if it's tax-deductible based on your tax bracket. If not, then you should pay that off as soon as possible, too."
In addition to financial planning, Corey says you should check the interest rates on your credit cards and student loans to see if you can find lower rates.
"If you have a lot of debt, you should be using all available funds to pay it off," Corey says. "If you have a little bit of debt and you have, for example, $2,000 per month for savings, you should use one-third to pay down your debt, and then use the rest for retirement savings."
3. Max out your employee benefits
"In your 40s, you should at least be saving as much in your 401(k) as your employer matches," Laux says. "Even if you weren't making any profit on that investment, your money doubles just because of the employer match."
Corey says since every employer has a different retirement plan, you should find out how much you can contribute, and maximize your contributions up to that limit.
"Find out how your pretax contribution will impact your cash flow because you may be able to contribute more than you think," Corey says.
People in their 40s can contribute up to $17,500 in a tax-deferred 401(k).
"Hopefully, the employer-sponsored retirement plan has someone who can explain the investment options within the plan," Laux says. "In particular, people need to understand why it may be better to be a little more aggressive with their investments at 42 than at 62."
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