Last month, I wrote about the Top Ways to Build Wealth in Your 50s. This month, let’s talk about wealth building in your 40s. Dare I say that in your 40s, you’re hitting your mid-life stride? 40-somethings are kind of walking a tightrope with their wealth – maximizing earnings, minimizing debts, and prioritizing needs and desires.
There’s a lot to think about in your 40s: if you don’t have kids in college, chances are you’re at least thinking about saving for college. Usually, your late 40s into your 50s are your top earning years, so with your higher income, you might be thinking about buying a larger house, traveling, golf club memberships, or luxury cars. It’s easy to get distracted!
So, what’s a 40-something to focus on if you’re serious about building wealth? Here are my top tips:
Save 50% of every raise
In your 40s, you’ll likely have promotions and job opportunities that can lead to significant increase your income. Lifestyle creep is prevalent at this stage of life, and it’s tempting to adjust your lifestyle upward with each bump in income. Proceed with caution!
Instead, a smarter wealth building strategy is to save at least 50% of every raise. That may even seem generous to some, who might save an even larger chunk of their raises. Obviously, if you can save even more, that is even better. But if you’re wanting to travel, or do some fun things you couldn’t afford to do before, committing to only spending 50% of each raise will help you build a larger savings/401k and narrow the gap to retirement.
Create passive income streams
With the extra income you’re generating in your 40s, another wealth building strategy is to create a passive income stream. Passive income streams usually require an initial outlay of cash or investment money and time, but after some work, will bring you consistent income without a lot of effort on your part.
One good example of a passive income stream is a rental property. There are some dividend stocks you can invest in as well that can bring regular payouts. You can also turn a hobby into a business, or become a silent partner in a business. Every person’s path is different, but it’s something to consider in your 40s!
Curb the cost of kids
Did you know the cost of raising a child from birth to age 17 is $491,000 for families earning over $100,000 year? A significant portion of that cost (30%) is estimated to be clothing and “miscellaneous”. If you’re saying “yes” to all of your kids’ requests, it might be time to start saying “no”. If not for the sake of your wealth building, for the sake of the kids.
For more in-depth info on that, I recommend “The Financially Intelligent Parent” by Eileen and Jon Gallo, who propose an 8 step strategy to raising successful, generous, and responsible children.
Surprised by this one? Many people are! Yet, research shows that people who exercise at least three times a week earn 6% to 9% more than those who do not, according to research by Cleveland State University professor Vasilios Kosteas. Initially the correlation may not make sense to you, but diving in, Professor Kosteas cites growing evidence that fit employees are more productive and manage work-related stress better, which can lead to faster career advancement.
Get Life Insurance
This is another one that you might not think about as a wealth building strategy. And honestly, it’s more for your family than you. Buying a life insurance policy helps ensure that all the money you’ve worked hard to save for retirement is used for its intended purpose, should you pass away in the meantime.
For example, if you died without life insurance, your spouse or family members might have to dip into those accounts to pay off debt or assist in burial expenses. Life insurance helps ensure that your family is taken care of, and that they won’t have to spend your retirement money prematurely.
I recommend speaking with an insurance advisor on the type and amount of coverage to invest in. The point is, if you don’t have it, the time is now!