Money Mistakes You Need to Fix in Your 40s

Rudro Chakrabarti
Money Mistakes You Need to Fix in Your 40s

Financial advice is abundant for retiring adults, and for those many millennials out there, too. But what about the folks in the middle?

If you're in your 40s, you're in an interesting financial spot because you likely already have a career and a home, and you may even have a solid plan for retirement.

Although it may seem like a great place to be, here are 10 money pitfalls that need to be avoided.

1. Not saving enough

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When building your retirement savings, factor in how inflation may effect the cost of living.

It may be decades away, but you need to think about how much money you'll need in retirement, after you stop pulling in normal-sized paychecks.

The median retirement savings for Gen Xers (Americans between ages 40 and 54) was $35,000 in 2017, as revealed by a study from Allianz.

But you'll need much more than that. By one popular formula, you should have approximately three times your salary saved by age 40.

Keep in mind that the cost of living may be higher by the time you retire, and you'll likely have greater medical expenses. And Social Security, which already doesn't go very far, is running out of money.

2. Raiding retirement funds to pay for your kid's college

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Seek out bursaries, scholarships and loans instead of dipping into your retirement.

Every parent wants to help their kid pay for college, but taking money out of your retirement funds to pay for your child's education will grossly reduce your principal. Especially if you're in line with the median and have only $35,000 saved so far.

A young adult in college is about to enter the workforce, while a middle-aged parent is about to exit the workforce. Your child will make more money in the next few decades than you will.

If you can't afford to support your children without dipping into your retirement funds, consider helping them find scholarships or even reasonable student loan terms instead — while helping them where you can.

3. Not having enough insurance

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Protect your family by investing in a life insurance policy.

As morbid as it may sound, the chances of a unexpected passing or career-ending injury increase for adults over 40. "Unintentional falls" are the leading cause of non-life-threatening injuries, and "unintentional injuries" become one of the main causes of death in adults ages 34 to 54, the CDC reports.

Life insurance and disability insurance may have seemed like optional luxuries as a young adult, but in your 40s these types of insurance morph into a neccessity.

If someone in their 40s couldn't support their family because of a life-changing or ending accident, insurance would help keep them afloat.

4. Putting off estate planning

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Investing time in your estate planning will give your loved ones the peace of mind they deserve.

Estate planning helps determine where your assets end up in the event of your death. While no one wants to think about dying (not to be a buzzkill or anything), those who avoid this crucial step put their loved ones in a lurch.

If you don't have your wishes legally documented, your assets could be held from the people you care about the most.

Even if you don't have much to leave behind, estate planning can help your loved ones avoid a big mess on top of their grief. It can be as simple as setting up beneficiaries for your current savings account and retirement accounts.

5. Not talking with your parents about their finances

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Talk with your parents about what steps to take in the event of an emergency.

People in their 40s are nearing an age where their parents' health may decline drastically.

One medical emergency could leave your healthy parents needing your constant care.

If this happens, it will also be your responsibility to handle their finances. Without making them feel uncomfortable, you need an understanding of your parents' financial health.

6. Refinancing into another 30-year mortgage

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Paying for the mortgage post-retirement places an unecessary burden on your pension funds.

It's best to hold a mortgage while you have regular income coming in. Even with the best planning, paying for a mortgage during retirement has left many elderly adults in a precarious financial situation.

In your 40s, you're often tempted to refinance and free up home equity — to fund a remodel or to lower monthly payments. This decision can lead to regret during retirement.

If refinancing is the right choice for you, considering refinancing into a 15-year mortgage instead, if you can afford it. Want more MoneyWise? Sign up for our newsletter.

7. Having mortgage tunnel vision

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It feels great to pay off your house — but don't neglect to add some money to savings.

There are disadvantages to every situation. Some adults who hate debt pour all of their extra income into paying off their mortgage, but that's not always the best thing.

If you put everything you have into your mortgage, your money will stretch thin and you'll miss out on other, better things to do with those funds.

Good reasons not to pay off your mortgage early include giving yourself extra cash to invest, let compound interest work for you, and generate returns higher than your mortgage is charging.

This will ensure that when you do pay off your home, you'll have enough money to live on.

8. Letting credit card balances run amok

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Don't ruin your credit this late in the game — pay your bills on time.

Running a high balance is not a big deal to most 40-something adults because they have the money to pay it off. Keeping a high credit card balance — or worse, maxing out your cards — is terrible for your credit score.

High or maxed balances make your credit utilization percentage skyrocket, and credit utilization is one of the biggest factors affecting credit score.

Plus, as soon as you miss a payment, late fees and interest start to pile up. You might quickly find yourself in debt. In your 40s, focus on getting rid of monthly bills, to have the most money available for retirement.

And at least make sure your card has good rewards for you to take advantage of, so you can squeeze some money back.

9. Having a puny emergency fund

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As your income increases, so should your savings.

Only 46% of Americans have set aside three months' worth of living expenses in an emergency fund, according to the securities industry group FINRA. Those are rookie numbers.

Everyone should have enough set away to get by for up to six months, because emergencies happen — and not just medical ones. Layoffs take their toll, broken-down cars cost a fortune, as can repairing water damage from flooded basements.

Be prepared, and build up your emergency fund.

10. Spending too much to remodel your home

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Your 40s are not the time to be acquiring major debt.

The typical range for remodeling your home is around $18,500 to $75,000, according to HomeAdvisor. The national average is $45,000.

We get it, you really hate that asphalt roof and you're looking to put in some slate.

But if it's not in disrepair, you can most definitely afford to keep it as is and contribute the funds to your emergency fund or retirement savings.

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