Personal finance checklist for those crossing 40

Posted by: Uma Shashikant on Sep 04, 2017, 02.20 PM IST

When anxious young couples ask whether they are doing enough to secure their finances, my answer is standard: By the time you are 40, you will be surprised how well you are doing. There is something about turning 40. Something like a midpoint, where there are enough patterns of habit to acknowledge, and still enough room for the new, untried and unknown. So here goes a personal finance checklist for those who are hitting their 40s.

First , outgrow the Joneses who have nagged your life for too long. The disease begins at teenage when peer group comparisons matter a lot. It then spills into comparing job offers, cars, homes, holidays and despicably enough can cover the spouse and children, their looks, marks and capabilities. The 40s is the best time to knock it off. You have enough achievements to call your own, have grown old enough to have your world view, have enough experience to say what works and what does not, and importantly, you know in your heart what really matters. A life of constant competition with others leaves you too little wealth and happiness.

Second , stop obsessing about mastering the stock markets. If you have not learned the skill of equity investing by the time you are 40, it is time you hand your money over to the professionals. Make the sensible decision to use index funds, mutual funds and professional services to ensure that your money has the opportunity to make the returns that the equity market offers. If the stock trading games that spilt over from your graduate school days did not make you a pot of money, 40s is the right time to acknowledge that you do not have the time or skill to make money on the side by staring at the flickering screen. Or, if you have been on the edge and refusing to invest in equity until you really know what it is, your time is running out.

Third , make sure you have an investment philosophy. Write it down, discuss with friends and family. Make a plan to implement whatever you have arrived at. Ad hoc buying of IPOs, insurance, tax saving schemes, and funds will not take you too far. You must know how much you will invest, where, why and how. If you do not have an investment philosophy by the time you are 40, you still do not have a guiding strategy that will help your finances and enable discipline in saving and investing. You still have 20 years to finance the strategy and you will be fine if you begin now.

Fourth , do not brood over past mistakes and errors. Focus on making corrections. Sell off that second or third property you bought in the suburbs and are struggling to pay EMI for. Close that insurance policy that is making no returns. If you are 40 and still wonder why you have not been able to save consistently, and you worry about where all the income seems to be going, you should see the flashing red light of penury in old age. If you are not already saving at least 30-40% of your income, you are either earning too less or you are spending too much. Fix that problem before it is late.

Fifth , get some control on expenses. The 40s is the time when incomes soar as you reach your potential and enjoy the confidence of being successful in your chosen career. The risk you run is lifestyle creep. As your income increases, you find it easier to spend, and are comfortable flashing your success in your lifestyle habits. If your expenses on lifestyle items runs along with, or ahead of your income, you will suffer the failed filmstar syndrome, where all the income was lost to flashy clothes, parties and cars, with nothing left for the proverbial rainy day. Whenever you get a raise, ensure that at least half of it is saved, and only half is available to splurge.

Sixth , get rid of debt. If you are in your 40s and still pay minimum dues on your credit card, you sure have some growing up to do. In the early years of earning, matching income with expenses is tough. It is also easy to feel entitled about spending more than the cash one has on hand. But as you move through the earning years, you understand that living within your means, and making choices that fit your income are sensible. High-cost debt only drains your income and steals the opportunity to do more, and build other assets. Your large unexpected bonus should bring joy, not relief that you can now retire another debt. Cut up the excessive cards, stop taking personal loans, and establish credibility among friends and family without seeking hand loans.

Seventh , get serious about long-term goals. Unless you plan to sell it off, your second house bought as an “investment” will not fund the education of your child. And even if you spent a fortune on your kids, you know that they will go their way leaving you to fend for yourself in retirement. If you have not already begun saving for retirement, you should do so now before it is too late. It is a good idea to make a detailed financial plan and set specific targets about how much you will save, how you will invest it, and stick to the plan year after year. As you move up the income ladder, your ability to save and invest will grow large enough to make up for the lost-in-a-daze first 20 years of your earning life.

Eighth , ensure that you have conversations about money with your family. The 40s is an appropriate stage to converse with your aging parents about their needs. Know what they expect, and how much you can do. Sit your spouse down and share the details of your income, savings and wealth. It is important to set joint long-term goals and work on them together. Involve the children in the business of managing money. Let them know what you do and why, so the foundation of their money values is laid.

Many celebrate reaching 50 as a landmark age. From a personal financial standpoint, the age of 40 is a better benchmark because you have the power to make decisions for your future, when your outlook for your career and life is still optimistic, positive and full of possibilities. Do not miss that opportunity.

The author is Chairperson, Centre for Investment Education and Learning. This article appeared in Economic Times dated Sep 04, 2017, 02.20 PM IST