Whether you embrace it or not, reaching the age of 40 represents a significant life milestone. It’s seen as the time we move out of early adulthood and into middle age, the life stage that precedes our retirement years.
Many of us, by the time we’re 40, have reached a point of increased security and responsibility. We’re often earning more, but may also be facing increased financial pressures as a result of home ownership, parenthood, or caring for elder relatives.
A key part of achieving a stable financial future is planning for success. While personal finance may not seem important in our twenties, it grows in importance as we age. Greater discipline may be required to reach goals and make gains.
If you’ve got a 40th birthday on the horizon and have questions about the health of your personal financial picture, here’s a look at a few goals many experts agree are important to aim for before the big 4-0 arrives.
Canada’s real estate market has been running red hot for years, and property ownership has felt out of reach for some. Although most home purchases only require a down payment, even saving up 10 or 20 per cent of the cost of a home can be daunting. Nevertheless, if property ownership is going to provide a stable home for you and your family, it’s worth it. And the earlier you get into the market, the faster you’ll eventually pay off that mortgage, leaving some high-earning years in later life to add to your retirement savings before finishing work. Also, interest rates are currently lower than they have been in years.
Personal finance experts all agree on the value of having an emergency fund you can tap into in times of need, whether it’s to cover an unexpected expense, a health emergency, or to pay the bills during a period of unemployment. The general rule of thumb is your emergency fund should contain the equivalent of three to six months of salary. Keep some of it in cash in a high-interest savings account – although your money won’t earn as much as it might if you invested it elsewhere, the trade-off is having easy, penalty-free access to your funds whenever the need arises.
A retirement fund, and a plan
At age 40, you should have already started saving for your future, taking advantage of the power of compound interest, and giving your savings extra time to grow before retirement. The rule of thumb is that a solid retirement fund will be worth at least three times your annual salary at the time you turn 40 (growing to six times by age 50).
More important than the amount, however, is the strategy you’re following to secure a stable retirement. Are you maximizing the tax benefits of RRSP and TFSA contributions? Are you benefitting from a matching or top-up program provided by your employer? Have you worked with an investment advisor to build a diversified portfolio of assets that insulates your savings from market volatility? If you haven’t already done some serious planning about the direction your savings are going, don’t let your 40s start without getting down to business on this front.
If you’re a parent, don’t wait for your kids to hit high school before you start putting money away for post-secondary education. As with retirement savings, it’s far better to start saving when your children are young, letting time work to your advantage and helping you build a bigger education fund for your budding scholar (or scholars). Don’t forget to take advantage of federal government grants that top up annual contributions to an RESP – parents can get up to $7,200 by maximizing the benefits of the Canada Education Savings Grant.
While you may not want or need reminders of your mortality as you approach age 40, one important (and often overlooked) aspect of personal finance is estate planning. This is the process of ensuring your loved ones will be looked after once you’re gone.
While some people see estate planning as something that’s only for the wealthy, it’s important no matter how much money you’ve got, because it’s the best way to determine what happens to your hard-earned savings. Dying without a will can lead to serious financial headaches for your surviving family, and could mean assets such as life insurance proceeds and retirement savings don’t automatically get passed on to your beneficiary.
If you don’t already have life and health insurance coverage, you might choose to make these part of your estate planning. Getting insured when you’re still (relatively) young can lead to lower premiums while still providing the long-term security and stability you seek.