Your 40s are often your most complicated years, financially. People in their 40s are often managing debt and dealing with increased expenses, which can leave them wondering how to save money and explore investment options at the same time.
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
You may wonder how to save money while paying your expenses. When you make a budget, be sure to set 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. After exploring their investment options, they chose a balanced growth portfolio with a 7% return.
2. Follow a housing budget
Depending on where you live, housing costs can consume a lot of your income, leaving little for savings. If you’re wondering how to save money while paying for housing, consider these guidelines:
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. When you’re wondering how to save money, getting rid of high-interest debt first is important, as it can cost you more in the long run. 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 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, exploring investment options, and building a timeline to reach your goals.
4. Expect the unexpected
The cliché is well-known for a reason. Unexpected costs will be far less stressful if you have money set aside. Call it a cushion, a safety net, an emergency fund - call it anything you like, just make sure you have one.
An emergency fund is especially important if you’re a homeowner. The general rule is to set aside at least 1% of your home’s value every year. When you’re wondering how to save money, this will help you avoid having to borrow money and pay interest for unexpected costs. 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
Since you may have less money available for savings in your 40s, it’s important to make sure your investment options have 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, if you’re wondering how to save money or choose sound investment options, good advice is always helpful. At Meridian, we pride ourselves on building relationships with our Members – you can rely on us to provide friendly, expert support.