Your 40s are often your most complicated years, financially. People in their 40s are often managing debt and dealing with increased expenses, which can make saving seem like a lower priority. This is understandable, but it also means that later on, when you do turn your mind back to saving, you feel stressed about getting “caught up.”
We asked Nancie Taylor, a Senior Wealth Advisor at Meridian, for advice about keeping your savings on track and coming out of your 40s feeling confident and secure. Here are 6 simple tips from her.
1. Put your money to work
When you make a budget, make sure you’re setting aside some of your income as savings. When you invest a portion of what you earn, that money goes to work for you by earning interest. That means more savings for you to enjoy later!
Here’s an example of growth for a couple with a household income of $80,000 who set aside 10% of their annual income each year, investing it in a balanced growth portfolio with a 7% return.
2. Follow a housing budget
Depending on where you live, housing costs can take up a lot of your income, leaving little for savings. Did you know there’s actually a guideline for how much of your income should be spent on housing?
The general rule is to spend 28% or less of your total monthly income on housing-related expenses. So if you earn $60,000 per year, your total housing costs should be no more than $1,400 per month to cover your rent or, if you own a home, your:
Mortgage principal and interest
Taxes and insurance
3. Understand your debt
Approximately 73% of Canadians carried some kind of debt in 2019, according to the Canadian Financial Capability Survey. You know what that means? It means having debt is normal. Debt doesn’t mean that you’re bad with money. Understanding and managing your debt is the real key to healthy finances.
For example, not all debt is equal. Some forms of debt, like credit cards, car loans and lines of credit, have higher interest rates. This is the kind of debt you should pay off faster, because carrying it can cost you a lot in the long run and leave you with less money for savings. Mortgages, on the other hand, typically have lower interest rates.
Keep these differences in mind when you create a debt reduction plan. Here are a few other tips:
Set a date for when you want to pay off your different debts so that you can plan payments and stay on track.
Include debt payments in your household budget.
Consider restructuring your debt so that it’s easier to pay off.
Talk to an advisor to get help setting up a plan for your specific debts, goals, and timeline.
4. Expect the unexpected
It’s a well-known cliché for a reason. 2020 was the year of unexpected expenses for many, and people who had money set aside for emergencies and unexpected expenses reported less financial stress. Call it a cushion, a safety net, an emergency fund - call it anything you like, just make sure you have one.
Having an emergency fund is especially important if you’re a homeowner. In fact, the general rule is to set aside at least 1% of your home’s value every year. For example, if your home is valued at $600,000, you should put aside $6,000 per year (or $500 per month). That way, you always have money available for upkeep and repairs.
5. Maximize long-term savings
As we’ve said, you may have less money available or savings when you’re in your 40s, so you should make sure that the money you do invest has maximum growth potential. Let’s take a look at the Rule of 72 - a simple tool that goes all the way back to ancient Greek, Roman, and Mesopotamian civilizations.
The Rule of 72 is an easy way to estimate how long it will take for an investment to double if it has a fixed annual interest rate. Here’s how it works:
It’s easy math that can help you evaluate investment options and maximize your savings.
6. Talk to an advisor
No matter where you are in life, or how much you have saved up, good advice is always helpful. At Meridian, our advisors will help you create a savings plan that gets you everything you want. We pride ourselves on building relationships with Members so that no matter how your life, finances, and goals change, you can rely on us to provide friendly, expert support.