You may not look toward middle age with zeal, but by planning for financial security with a sound budget, you can make these the best years of your life. A budget is simply a dynamic document that gives you a picture of the money coming in (income) and the money going out (expenses). It changes with your circumstances. If you've never had a budget, you're not alone. Fifty-six percent of Americans don't, according to the National Foundation for Credit Counseling 2011 Consumer Financial Literacy Survey. As you enter your 40s, you've got important decisions and changes to make. In addition to your ordinary monthly expenses, your children may be about to go to college. Your parents may need additional care, and retirement is only a whisper away. No matter what stage of life you're in, it's never too late to begin managing your finances.
1. Get the big picture first. Determine the best interval to make a budget, whether weekly, monthly or some other time frame, based on the regularity of your income and expenses. List all the money you get in a month, from your job or business, interest on your savings and investments and any other payments you receive. List all your expenses, including taxes, housing costs, transportation, food, insurance and health care, debt and utilities. Make allowances for fixed and irregular categories, such as entertainment and recreation, clothing and miscellaneous.
2. Do simple math: subtract your expenses from your income to evaluate your financial health. Decide what your money priorities are and chart the way to get there. Track your spending with minute detail. Look for opportunities to shave money off your expenses. Start to limit your use of credit to make purchases. Save more money. Consider charitable giving.
3. Fund your retirement, or boost your contributions. Place at least 10 percent of your income into retirement savings accounts and max out the contributions allowed through your employer. Talk with a financial advisor about your money needs for the future. A survey of registered investment advisors by Scottrade suggests that most Americans have an unrealistic idea of how much money they will need to live comfortably in retirement. Aim for about $1.5 million to $3 million in the bank so you don't outlive your money.
4. Review all your investing alternatives. Determine whether you're being too conservative or shouldering too much risk in light of your future financial priorities. Shift accordingly. Seek professional help to find out if there's a way to allow your money to grow -- and last longer -- without adding too much risk or instability to your investments.
5. "Put your pedal to the metal in paying down your mortgage, so that mortgage is gone by the time you are in your 60s, 65 at the latest," advises personal finance guru Suze Orman. This is the first step in a comprehensive effort to reduce your entire debt load. Spend your 40s clearing your entire debt burden so you can enjoy your later years.
6. Insure up. Make provisions to cover life, health and long-term care insurance needs in your budget. Plan your estate. No matter its size, create a will, decide on power of attorney and set your medical directives. These are important adjuncts to your financial life at this stage. They ensure that all the hard work you've done in accumulating wealth doesn't get waylaid as you progress toward ending your formal work life. They also ensure that your earnings and savings will benefit your loved ones.
- Your 40s may seem all about responsibility; you work hard and care for your family. But you shouldn't neglect yourself either. This stage of life offers an opportunity to pursue put-off passions with the stability you've built over time. Think about your future work life in your 40s. You may be retiring from your safe job in a while, but perhaps you could transition to the work you've always wanted to do. If that requires going back to school or getting additional training, go for it. Create room in your budget for educational needs and re-evaluate your spending to allow for this.
- Take stock of your financial life. Not everyone has an investment portfolio and immeasurable wealth. Even if you do, you aren't immune from issues surrounding your health or the ups and downs of the economy. If after creating your budget you realize your finances are disordered, you may have to consider ways to make extra money in addition to cutting your finances. Look into a second job or a side business. Know that delaying retirement may be an option, if not a requirement, to keep your house in order.
Items you will need
- Income statements
- Interest statements
- Monthly bills
- Account of variable expenses
- National Foundation for Credit Counseling; The 2011 Consumer Financial Literacy Survey Final Report; March 2011
- Scottrade; New Research Study -- $1 Million Is Not Enough for the Average American Family to Retire; February 22, 2010
- Black Enterprise; Help Prioritizing Your Financial Responsibilities; John Simons; October 27, 2010
- SuzeOrman.com; Suze Orman Retirement Roadmap; September 19, 2009
- Crown Financial Ministries: Family Budgeting
- MSN Money; In Your 40s? Do a Financial Checkup; Michael Maye; June 20, 2011
- American Bankers Association Education Foundation: Monthly Budget
- DeRose Financial Planning Group: Life Goals -- Financial Essentials for Your 40s
- National Foundation for Credit Counseling: The Importance of Creating a Budget
- Robert Wood Johnson Medical School: Budgeting Basics
- DaveRamsey.com: The Truth About Budgeting
- Black Enterprise; Smart Money Moves for Every Stage of Life
- Comstock/Comstock/Getty Images