By the time you hit 40, you will have crossed many of your financial goals off your checklist. At this point you are expected to figure out most things about your money and other priorities.
Since people today live to an average of almost 80 years, it can be assumed that a 40-year-old has lived more than half of his life. As such, it’s an age that, for most people, comes as a wake-up call when one needs to take stock of one’s financial situation.
And if you haven’t saved or invested a cent yet, there’s still time. Here we explain how to do it.
it’s never to late: By the time you were 40 you would have worked for at least 15 years if you had worked continuously. This would mean that at that age you would hold a fairly high or middle position in your job. It also means you get a decent salary. You have 15-20 years to save and invest properly. You can do the same with your excess money. This gives you time to benefit from longer-term compounding. You may also be able to close some of your loans, giving you additional funds to invest.
Also, remember that since you only have 30 years left, you don’t fall into the justice trap meant for the young. “Make a long-term commitment to stocks, and since you have money now, focus on investing whenever possible. Don’t fall for the guaranteed return trap, now you know better!” says Shweta Jain, financial planner, CEO and founder of Investography, a financial planning firm.
It would be wise not to lock up your money in assets and liabilities. You learn from the experience of others and yourself how it works. “Avoid this mistake and it will help you take advantage of your age and wisdom,” says Jain.
Creating a detailed financial plan: It’s never too late or too early to start planning your personal finances. Ideally, if you are heading into 40 or are in your early 40s and haven’t saved enough yet, creating a detailed financial plan should be the first step, as it is today. Displays your personal financial status.
During financial planning, you should identify and determine your short, medium, and long-term financial commitments in life.
Arijit Sen, a SEBI-registered investment advisor and co-founder of Kolkata-based financial advisory firm Meri Mind, says: “It is important to conduct a thorough analysis of cash flows and net worth. During financial planning, you need to identify and determine your short, medium, and long-term financial commitments in life. Once you have a clear picture of “what” you need to achieve and “when” you need to achieve it, you will be ready to figure out “how” to fulfill your time-bound commitments.”
Needs may be limitless, but resources (your income and existing assets) are clearly limited. With a limited work life, prioritizing is the way to go.
“Developing priority metrics and labeling existing investments with specific goals requires a lot of discussion. It is important to know what you need to do sequentially in order to complete your commitments sequentially. This practice prevents you from misusing your investment. A typical example of such abuse could be withdrawing retirement savings for your child’s marriage or higher education abroad,” says Sen.
Basic mistakes to avoid with a limited working life: If you think you’re already 40 and that you’re running late compared to others around you, don’t make the mistake of chasing high returns on investments—it’s a trap. Only seeking highly profitable products without understanding their risk profile can prove irreparable due to a lack of limited time.
“It would be wise to focus on how to save more and invest in your top priorities. Therefore, it is important to focus on your cash flow. Financial planning tools and processes to track and budget your family’s cash flow allow you to identify surpluses for targeted investments,” says Sen.
Top up your SIP: Try to increase your Systematic Investment Plan (SIP) every year. Aside from your regular monthly investment, try to increase it with your bonuses, incentives, etc. Eventually, long-term SIPs will help you build a portfolio large enough for your retirement.
Consider expanding your career; Start a side job. If you haven’t been able to save by the age of 40, you can advance your career by a few years. You can use this period not only to save money, but also to maintain your existing body. Also, be mentally prepared to work long hours so you don’t feel financially stressed. You can also take a part-time job to earn extra money. Above all, remember not to put all your eggs in one basket. And you should learn to diversify your money across different portfolios.