It doesn't matter if you're in your 20s, 30s, or 40s — everyone makes financial mistakes. But, the mistakes we make in our later years are often different from those we made as a young adult. Even if you've gone through some financial growing pains, there's room for improvement.
Here's a look at six financial mistakes you need to stop making by age 40.
1. Buying More House Than You Can Afford
Some young adults rush to acquire the same lifestyle as their parents, and they get in over their heads buying homes they can't afford. I've seen it with several of my friends — they want to look like they ball, but can't maintain the proverbial court. But there's no rule that says we have to constantly move up. If you're living above your means, it's time to downsize and get serious about your money.
Being house poor can have a tremendous impact on your personal finances. You might be able to swing the house payment every month, but if you don't have money for anything else, you're less likely to save for retirement — and there's a good chance that you'll end up with credit card debt. Besides, the cracks will eventually show — and that will defeat the purpose of why you went into debt in the first place. Not worth it at all.
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2. Tapping Into Your 401(k)
Twenty-something adults can afford to tap into their 401(k)s if they endure economic hardships or need cash to buy a house (although it's not recommended by most money experts). Since they're young, there's time to replenish the account. Older adults, however, don't have this luxury. If you're approaching middle-age and hoping to retire in your late 50s or early 60s, this isn't the time to play around with your retirement account. Stop using your 401(k) or IRA as an emergency fund. As an alternative, you need to keep enough cash in your liquid savings to deal with unexpected expenses that pop up. (Which, incidentally, might mean telling your kids "no" sometimes.)
3. Saving Like You're Fresh Out of College
When you're just out of college and starting out, you may not have a lot of cash to put toward saving for retirement. Therefore, you might contribute the bare minimum after opening a 401(k) — maybe 2% or 3% of your income. This is okay in your younger years. But by the time you hit 40, you need to step it up a notch.
Look into increasing your 401(k) contributions to 5% or 6%, especially if you're getting an employer match. This is essentially free money that can take your retirement account to the next level. (Plus, you deserve it!) Also, consider ways to diversify your retirement savings, such as opening an individual retirement account or dabbling in other investments, like stocks or real estate.
4. Putting Your Child's Needs Ahead of Your Retirement
All parents want to give their children the best. This might be the best private schools, extracurricular activities, educational vacations, or college funds. But be careful about putting your kids' needs over your retirement — after all, you can't afford to help them if your own financial situation isn't secure first.
The sooner you start stashing cash away for the future, the more financially stable you'll be when you leave the workforce. If you put the majority of your disposable income into giving your children the best life possible, your retirement could take a backseat to their needs and wants. And if you don't save enough, this can result in working longer than you want later in life, or having to get a job after retiring to make ends meet. Not to mention you might not be able to afford helping your children as much as you'd like.
5. Never Reevaluating Your Life Insurance Needs
Your life insurance needs can change as you get older. A policy purchased in your 20s while you were single without kids or a mortgage probably doesn't offer the coverage you need today. It might be time to upgrade your policy to ensure your family has enough financial support in the event of your death, especially if you're the breadwinner.
There are no hard or fast rules regarding how much life insurance to get, but the policy should be enough to cover your funeral and burial expenses, pay off any existing debt, plus provide your spouse and dependents with ongoing financial support.
6. Getting Comfortable With Credit Card Debt
At this point in your life you probably recognize the danger of using credit cards. But just because you no longer rely on credit cards doesn't mean you should get comfortable or shrug off your existing balances. If you still owe thousands, paying the minimum isn't going to cut it. Like, ever.
Develop a plan to get rid of credit card debt once and for all. Go through your house and sell things you don't need. Instead of spending a work bonus going on vacation, use this cash to erase account balances. You can even temporarily reduce how much you're contributing to your retirement account, and use the savings to pay off credit card debt. Whatever means you need to eliminate this debt (outside of robbing a bank, of course), use it. You'll feel freer and more financially stable once that burden is off your back.
Are there other financial mistakes we need to stop making by age 40? Let me know some of your suggestions in the comments below.