You need markers to measure yourself against when working towards financial goals. Let’s see how you stack up against these 13 money milestones to reach by 40.
Some goals are harder to quantify than others, but luckily for us, money goals are among the easiest to quantify because numbers don’t lie. Numbers can be subjective though so not all of these milestones are based on dollar amounts.
Why did we choose 40 as our age? Because 40 is a good middle point for most people. We’ve been working for about 20 years, and we still have about 20 more to go.
It’s also an age that gives you enough time to get caught up if you’re not meeting money milestones. So don’t worry if you’re off track but don’t ignore the situation either. You can catch up, but you’re going to have to start doing things differently than you have been and while we hate to say it’s ever too late to do anything, time isn’t exactly on your side when you’re 40 or older and falling well short of reaching certain money milestones.
1. You Have No Credit Card Debt
Credit card debt is among the worst kind of debt you can find yourself in because of the high-interest rates.
If you’re not paying off the balances in full each month, it can be nearly impossible to get rid of the debt once and for all and even when you do; you might have paid thousands of dollars in interest alone.
Yes, people can find themselves in credit card debt for reasons like crippling medical expenses, but a lot of credit card debt is merely a result of an inability to live within a budget and to deny ourselves things we can’t afford.
By the time you’re 40, you should be able to control impulsive spending so that you’re at least not continuing to add to the credit card debt you already have even if you haven’t managed to pay it off yet.
If you are still in credit card debt, there are several things you can do to finally get it paid off. Apply for a balance transfer card, get a debt consolidation loan from your bank or credit union or an online lender like Prosper or Lending Club, or call each card and ask if they will lower your interest rate.
And make a plan of action to pay off the cards. A scattershot approach to paying off multiple credit cards doesn’t work. You have to attack one card at a time and pay it off entirely and then move on to the next.
This has to be your priority. You may have some retirement savings and credit card debt, but for many people, credit card debt is preventing them from saving for retirement or anything else. If you’re heading toward the big four-oh and still in credit card debt, you must get it paid off and fast.
2. Your Emergency Fund is Fully Loaded
Early in 2018, an alarming statistic was published, only 39% of Americans have enough money to cover a $1,000 emergency. When you don’t have an emergency fund, you’re so vulnerable to things like credit card debt, payday loans, or even losing your job or home. To have a $1,000 emergency fund when you’re 25 is excellent but by the time you reach 40, it’s not nearly enough.
If you’re 40 or getting close, you need an emergency fund that contains six months worth of essential expenses. This sounds like a lot of money, and it is but if you’re 40, you can’t continue living paycheck to paycheck. You don’t have to accumulate the money all at once, it can take time to build an emergency fund, but it is one of the most important money milestones you can hit.
3. You’re in the 20% Club
As Americans live longer, health care costs become more expensive, and the future of Social Security is in doubt, it becomes clear that we need to save as much money as we can for retirement. It might seem a lofty goal to save a full 20% of your income, but once you’ve achieved the first two milestones on this list, it becomes easier.
There are all kinds of calculations and theories about how much money you’ll need to retire, but it’s safe to say that you won’t meet any of them if you don’t start saving 20% of your income when you reach 40.
4. You Have a 401k
Part of that 20% should be in a 401k. A 401k is an employer-sponsored, tax-advantaged retirement investment account. Not only is a 401k an excellent way to save for retirement, but it can also lower your taxable income as well.
There is a maximum yearly contribution limit for 401k accounts, for 2018 it’s $18,500. Occasionally the limit is raised. If you’re not sure how well your 401k is doing, Blooom can show you. If you’re paying a lot of fees, something that can really hurt your retirement savings over time, Blooom can suggest alternatives with lower fees.
By the time you’re 40, you’ve probably had a few jobs. If those jobs offered 401ks, you may have a few out there scattered around. If so, you need to consolidate them. Having several accounts makes things hard to keep track of, you may be charged higher management fees than current employees are subject to, and the fund you chose may not be ideal.
If your current job has a 401k, you may be able to roll the old ones into it. If not, you can roll them into an IRA. Choose either of those options rather than cashing out which may mean you’re money is subjected to early withdrawal fees and may have tax implications.
5. And an IRA
Because 401ks have contribution limits, if you’ve maxed yours out (great job!) you’ll want to open an IRA and start contributing to that as well. An IRA is another type of tax-advantaged retirement account. The current contribution limit is $5,500 per year.
Another advantage of an IRA is that you will have a lot of choices compared to the choices you have of 401ks since the funds are selected by your employer, and you can only select from what is offered.
6. Multiply It By Three
Up to this point, we haven’t given you any dollar amounts to shoot for so here is a hard number to aim for. By the time you reach 40, you should have three times your gross salary saved across your emergency fund and various investment types.
We like this money milestone because while it gives you a number to shoot for, it’s not one size fits all. Your number will depend on your salary. It’s even scarier than the six-month emergency fund number but don’t bury your head in the sand. We’re sure you’ve dealt with scary things before.
The only thing scarier than knowing is not knowing because than you don’t know where you are and by the time you find out, it might be too late. So get out your calculator and learn your number.
7. Throw In Some Real Estate
Having some investments in real estate is an important part of having a properly diversified investment portfolio. You might think the only way to invest in real estate is either be some kind of mogul or to own a rental property. Well, you aren’t a mogul, and you don’t want to be a landlord because you don’t know how to fix a leaky sink!
You can invest in an eREIT (electronic Real Estate Investment Trus) with Fundrise for as little as $500. If you’re interested in owning rental property, there are turnkey management companies that do everything for you from finding the right house to finding the right tenant, to all of the maintenance and repairs.
You don’t have to live in the same state as your rental house (great for those who live in high cost of living areas and therefore can’t afford a second or sometimes even a first home) or even ever see it in person.
8. You Hustle
Because there are so many ways to make extra money, many of them online that can be done right from the comfort of your home, everyone should have a side hustle that is bringing in some income when they hit 40. It doesn’t matter what it is or how much it brings in (although obviously the more, the better!) but it matters that you have one.
Wages have been stagnant for decades while the cost of things like housing and medical care have climbed higher and higher. For many of us, the salary we earn at our regular job alone is not going to be enough to retire, so we have to have more than one source of income.
Drive for Uber, start a part-time business doing lawn care of babysitting, start making things you can sell on Etsy, learn the finer points of thrift shopping and sell clothes on eBay or Poshmark. In 2017, just over 10% of Americans were working and making a full-time living in the so-called gig economy so it can certainly become a full-time thing eventually if you’re unhappy in your current career and looking to make a change.
Even if you are happy at your job and just want to side hustle part-time, every dollar you make is one dollar closer to reaching and exceeding your money milestones. And if you’re trying to catch up, a side hustle is non-negotiable.
9. You’ve Written a Will
By the time you reach 40, you may have accumulated some assets including a family. If you’ve accumulated neither, having a will isn’t a big deal. Your remaining relatives probably won’t be fighting over your collection of National Geographics, but if you have a spouse and or children, you need a will.
People often think that when they pass away, their family will rally together and do whatever the right thing is but money does funny things to people so you can’t count on everyone playing nice. If you want to be the one to decide who gets what, a will is the only way to ensure your wishes are carried out.
10. You Have Life Insurance
Again, if you don’t have dependents, having life insurance isn’t that important. The only exception to that is if your parents co-signed student loans for you with the understanding that you would be responsible for paying those loans off. If you die and the loans are not paid, your parents will be on the hook for them. Losing a child is already devastating, you don’t want to add what could be tens of thousands of dollars of debt to their burden.
If you do have a family that is financially dependent on you, life insurance, and enough of it, is a must.
11. You’re Forming an Idea
I know that 40 is young, and it’s hard to imagine what your retirement will look like but to know how much money you need to save, you have to start at least thinking about it.
Will you want to trade your house for a more manageable condo or apartment? Will you want to retire in your current city or move? If you do think you’ll want to move, will it be to a lower or higher cost of living area? Would you like to continue to work in some capacity or give up work completely? Do you want to spend a lot of time traveling?
By answering these questions to the best of your ability currently, you can work out a rough yearly budget which will go a long way towards helping you come up with your “final number,” the amount of money you need to retire.
12. What About Student Loans?
Should you really buckle down to pay off any remaining student loans as you near 40? I think there are pretty compelling reasons not to be in a big hurry to pay them off.
If you have federal student loans, you may be eligible for student loan forgiveness after about a decade of regular payments.
Federal student loans usually have interest rates well below the 10% you can expect to make on your investments over time, and because time is the most important factor in investing, you can make more money investing than you are paying out in student loan interest.
For a lot of us, our student loans are our oldest credit account because we took them out as teenagers, well before most of us had a credit card. Part of your credit score depends on the total average age of your credit accounts.
When you pay off those loans you’ve had for 20 years, it’s going to drop your credit score (seems very counterintuitive I know but that’s how it works!).
If you have private student loans, they are not eligible for any federal forgiveness programs, and they may have higher interest rates than do federal loans. If that’s the case, refinance them for a lower rate with LendKey. When you lower your interest rate, it saves you an enormous amount of money over time.
13. And College?
If you have children should you be saving for their college education? This might be an unpopular answer, but I don’t think parents are obligated to pay for their child’s college education. If you have more money than you know what to do with, by all means, pay for the full ride.
But if you’re nervous about being able to retire, you have to look after yourself first. Your kid has a lot longer to pay off his or her student loans that you have to save for retirement. Further, there are plenty of ways to get a college degree without taking out student loans, or at least not taking out enough in loans to pay for everything.
Have your kid apply for every scholarship they might even be remotely eligible for, tell them to attend an inexpensive community college for two years and then transfer to a more “prestigious” college or university, encourage them to work part-time and attend college part-time. Or suggest they work for a few years, save up, and then go to college.
There is no rule stating you have to start college the fall after graduating from high school or that you have only four years to graduate. When college costs as much as it does currently, the old path of going to the best (read: most expensive) school that will have you, starting at 18 and graduating in four years all financed with student loans just isn’t feasible nor advisable.
If your child insists on following that path, let them know they’re on their own.
You’ll Get There!
If you are not on track to hit any of these money milestones by 40, we know you might be panicking. But don’t. Remember, this is possibly only half way through your working life. There is time to get on track so you can daydream about retirement rather than dread it.