The average life expectancy around the world is roughly around 70-80 years. So, the age of 40 marks a halfway mark for many of us. How you manage your finance till that point will have a ripple effect on the second half of your life. So, if you want a smooth journey into the second half of your life, you must aim to fulfill certain financial goals in your 30s.
Goal #1: Define your ideal financial lifestyle
In our 20s and 30s, we tend to experiment with different things, trying out new ideas without a clear set of goals, making mistakes, and learning from them. But as we move closer to the age of 40, we need to clearly identify what is most important to us and how these priorities define our ideal lifestyle. Once you have a clearly defined ideal lifestyle, it makes your purchasing and investing discissions a lot easier and more thoughtful. For example, growing up you might have wanted to own luxury cars. But, as you get more mature, you may have realized owning a nice backyard where you can host your family and friends, gives you more joy than overspending on a car. Once you have clarity on your priority, you can maximize your spending and investment in those areas and cut down on things you don’t need.
In case you are not sure about your ideal financial lifestyle, here is a quick guide:
- Step 1: Write down what your ideal day would look like. Is it going out to a fancy restaurant with your significant others, or is it spending a relaxing day at home with your family?
- Step 2: Once your ideal day is decided, prioritize your financial decisions to achieve that.
Goal #2: Achieve 0 debt except for Mortgage
As you reach your 40s, a lot of responsibilities converge. It is the time when you get more responsibilities at work. You become a manager or take up other senior roles handling departments, managing teams, etc. Your kids grow up, and they need more financial assistance for their education and extracurricular activities. Adding to that, your parents will get older, needing much more medical care and assistance.
Debt is sometimes necessary to achieve some of your goals, but don’t let debt become a normal part of your life. When people get too comfortable with debt, they often indulge in unnecessary purchases or live a lifestyle they can’t sustain. This ultimately hinders your ability to manage your responsibilities in your 40s. If you are still trapped in debt at this stage, it will add a layer of stress on top of all these responsibilities. You can follow a Debt Avalanche or Debt Snowball method to pay off your debt quickly and more effectively.
Of course, you need to take debt to make big purchases like a house, or starting a new business, but you should always be very cautious about letting it become a normal way of living.
Goal #3: Achieve a credit score of 750+
Even though we try to avoid debt as much as possible, sometimes it becomes a necessity to avail debt, especially while paying for large expenses like buying a house. So, if you are going to get a home mortgage, you would want to get the best deal possible. Your credit score is often the deciding factor when it comes to how much interest rate the bank is going to charge you against the mortgage.
When you have a good credit score of 750+, you get the cheapest home loans. The bank sees you as a responsible buyer and offers a lower interest rate due to lower risk. The same home loan can cost you 1-2% extra interest if your credit score is poor. This may not sound like a lot, but for a larger sum of money (such as a home loan), this 1-2% extra interest can cost you thousands of dollars.
So, make sure you check your credit score regularly and aim to achieve a good credit score so that you get the best deal when you really need it.
Goal #4: Building a solid emergency fund
Building an emergency fund is very crucial for your financial security. It is the readily available cash that you set aside for emergencies. As you reach closer to your 40s, a lot of responsibilities converge at once. Your elderly parents may need urgent treatment, your home may need an expensive repair, or you may lose your job due to economic slowdown. At this stage, you don’t have as much flexibility as you used to have in your 20s. Now you have others who are dependent on you. Having a solid emergency fund will help you tackle such bumps in your life.
As a thumb rule, you should keep your 3-6 months’ worth of expenses in a readily accessible account (like a savings account) as an emergency fund. If you are a bit more sceptical, you can keep about a year’s worth of expenses in your emergency fund. If you still have some time to reach your 40s, it is a good time to keep some money aside every month to build your emergency fund.
Goal #5: Invest 5x of your annul expenses
By the time you reach 40, you should aim to have made enough investment that it can support your retirement. This concept is often called Coast FIRE. You achieve Coast FIRE when you have enough investment that even without any additional contribution, compounding alone will grow your wealth and allow you to have enough money when you retire.
As a thumb rule, If you can invest 5 times your annual expense by the time you reach 40, it should be good enough for most people to retire on, provided you hold on to your investment till you retire at the age of 65.
For example, if your annual expense is INR 10 lakh, then you should aim to invest INR 50 lakh by the age of 40. If you hold on to that investment till you retire at the age of 65, this allows the money to compound for the next 25 years. Assuming a 12% return on your investment, you should receive a total of INR 10 cr when you retire. This should be sufficient for most people to live a happy life after their retirement. Even if you retire at the age of 60, you will get around INR 5.5 cr at the time of retirement, which again is enough for financial independence.
Goal #6: Have a solid career capital
“Career capital are the skills you have that are both rare and valuable and that can be used as leverage in defining your career” – Cal Newport
In your 20s, it is okay to explore different options and career paths without developing any expertise in a specific domain. However, in your 30s you would want to focus on building your career and expertise so that you build your career capital that you can leverage in your 40s. With solid career capital, you can negotiate a higher salary or a better position which can be very helpful to achieve your financial goals.
Goal #7: Building a solid fitness regimen
Fitness is tightly correlated to finance. Not having a good fitness regimen will hamper your ability to work effectively, thereby restricting you from building solid career capital. You will earn less. Moreover, you may need to spend a lot on healthcare in the long run.
Your fitness regimen should be age appropriate. You cannot lift as much weight as you used to lift in your 20s or eat the way you could eat in your 20s. So, it is very important to have a healthy diet and exercise routine that suits your age and body type.
If you don’t take care of the one body that you have, it does not matter if you have a billion dollars. You won’t be physically capable to enjoy it. There is a saying that “Health is Wealth”. So, dedicate some time every day to developing a solid fitness regimen.
Goal #8: Get your Estate plan and Life Insurance in order
Your family will have their biggest financial needs from you in your 40s and 50s. That is the time when your kids will grow up and they will need college fees. Your parents will get old and require frequent medical treatments. What would happen to them if something happens to you? Life is very uncertain, and you must make sure you are prepared for that. That’s why I highly recommend you get a 20-30 year term life insurance that provides good coverage (INR 1 Cr or more).
Pro tip: Don’t waste your money on whole-life and variable-life insurance while selecting your term insurance. Term insurance that covers up to 65-70 years of age, should be good enough, because at that age your kids will no longer be dependent on you.
Besides that, work with a reputed estate lawyer to finalize your estate plan. By preparing the legal documents like a will, you will save a lot of trouble for your family in your absence.
Hope you liked this article. I would love to hear your thoughts in the comments.
