By the time you turn 40, the pace of your life is a lot different from what it was when you were fresh out of college or still figuring things out in your 30s.
Your biggest concerns probably revolve around striking the right balance between multiple priorities: being a good parent and partner, staying on top of tasks at work and chores at home, keeping a close eye on your aging parents and preparing for a (hopefully) not-so-distant retirement.
Let’s face it — your plate is full. And while your salary may be higher than it’s ever been in the past, saving money isn’t getting any easier.
Increasing your savings may require some hard work on your part. But with a sound strategy in mind, it can be done. 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 large percentage of your take-home pay goes toward bill payments. Money you could be setting aside for the future is instead needed to cover credit card payments and pay off a house and car. For borrowers in this situation, it’s best to focus on paying off high-interest debt, says Stuart Chamberlin, president and founder of Chamberlin Financial.
Chamberlin recommends targeting bad debt — like credit card debt — first. Unlike good debt (such as debt from the purchase of a home), bad debt costs you money without generating any increasing value in the future. 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 priorities
Once you knock out your high-interest debt, you’ll have to decide which financial tasks to tackle next. Should you work on growing your kid’s college fund before buying a new house? Should you focus on investing before growing your emergency fund (hint: no).
Everything can’t be done at once, so prioritize and determine what’s more important. Just make sure 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. “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.”
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 work toward maxing out your account.
For 2019, the most you can contribute to a 401(k) and similar employer-sponsored retirement plans is $19,000, which is slightly higher than the limit set in previous years. Individual retirement account holders can contribute up to $6,000.
You’re likely earning more money than you did in your 20s and 30s. But earning more money doesn’t mean you should be spending more money.
“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 won’t have access to a retirement plan funded 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, like expensive 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. Start saving for your children’s college education
In addition to saving and preparing for retirement, it’s best to start saving for your children’s future. 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.
There are multiple ways to save for college. One popular vehicle is the 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 to pay for education expenses. In certain states, you may qualify for a state income tax deduction. Coverdell ESAs are another option, but your annual contributions per student are limited to $2,000.
Your choices don’t end there. A Roth IRA is worth considering because you can technically withdraw your contributions penalty-free if the money is used to cover higher education expenses. 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 a student 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.
5. Consider flexible spending accounts
A flexible spending account is another benefit offered by employers. Not to be confused with health savings accounts (HSAs), flexible spending accounts (FSAs) allow employees to put away money in advance for certain expenses.
Contributions to FSAs are made through payroll deductions, and a portion of the money you agree to set aside for the year is taken out of every paycheck before it hits your checking account. These contributions are considered pretax dollars and reduce the amount of income subject to taxation.
For 2019, you can contribute up to $2,700 for health care expenses including:
- Medical services, treatments and supplies.
- Over-the-counter drugs and medications.
- Vision expenses such as glasses and contacts.
- Dental expenses.
Families may consider a dependent care FSA and cover the cost of child care and after-school programs using pretax dollars. The contribution limit for 2019 is $2,500.
FSAs can be beneficial for savers with a big tax bite. But there are some things to keep in mind before signing up. Some unused dollars could be rolled over into the next year. A grace period could apply, giving you more time to use the rest of your funds. Otherwise, you’ll lose access to the unused dollars you contributed.