Is it possible to build wealth in your prime years? The answer is yes. GOBankingRates spoke to several financial professionals about what individuals in their 40s need to know about building wealth and each asset that can help improve your wealth building.
Establish a Strong Foundation
The first step to building wealth in your 40s is to establish a strong foundation.
Marcus P. Miller, CFP and financial advisor at Mainstay Capital, said this foundation needs good money habits, like putting a decent percentage of your income into investment accounts. Those in their 40s also need a budget and should hire a financial advisor who will help keep their hand off the throttle.
Jason Blumstein, CEO and founder of Julius Wealth Advisors, recommends taking the time to take an inventory of your financial big picture.
“Understand your assets, liabilities, net worth, income, expenses and cash flow,” Blumstein said. “If you know where you are at, you know where you need to go.”
Once you have an understanding of this inventory, Blumstein said you will properly know if you need to add to certain areas. One of the most common cash flow mistakes Blumstein sees people making is not paying themselves first. Blumstein recommends making paying your future self an expense to automate your habits.
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Diversify Tax-Efficient Investment Accounts
Cecil Staton — CFP, CSLP, president and wealth advisor at Arch Financial Planning — said he can predict an individual or family’s ability to build wealth by determining what the savings rate of their gross income is.
Staton recommends individuals and families save at least 20% of their gross income for their long-term goals. After that, individuals and families should have a diversified investment plan. This includes having a blend of tax-efficient accounts like a Roth IRA, tax-deferred 401(k) and taxable brokerage account. Having the blend of accounts will give individuals and families greater flexibility in their retirement years to pull from each respective account when it makes sense to do so.
Build Up a Financial Cushion
Kyle Hurley, CPA and private wealth advisor at Munroe Morrow Wealth Management, said building wealth requires emergency savings and a financial cushion built up in the bank. If you keep significant funds in a savings account, make sure the account has a respectable yield.
Invest In Index Funds and Bonds
Another simple path to building wealth is investing in low-cost and broadly diversified index funds.
“If diligent savings and disciplined investing are executed, the only remaining variable is time. Typically, someone in their 40s has plenty of time for investments to compound and grow,” Staton said.
Those with cash they may not need for the next 12 months may put the cash to work by investing in Series I Savings Bonds.
“The Treasury will update the rates offered on these instruments on May 1 and November 1 of each year. As of right now, Series I bonds are paying 9.62% through October 2022,” Hurley said. (It’s important to note that this percentage is subject to change.)
Take Advantage of Workplace Retirement Plans
If you are in your 40s and work for an employer that offers a company retirement plan, max out your contributions and take advantage of any employer match to avoid leaving free money on the table. Hurley said those under the age of 50 with a 401(k) can put in $20,500 per year into this retirement account.
Create an Estate Plan
Those in their 40s should have a built-out estate plan. While every situation is different and estate plans are designed based on the state law of your primary residence, Staton recommends everyone consider the following accounts.
- Simple Will
- Financial Power of Attorney
- Advanced Directive
- Medical Power of Attorney
- Living Will
“If there are children, it’s incredibly important to consider and explicitly state who the guardian should be for the children if the parents pass away while the children are still minors,” Staton said. “In addition, post-mortem asset control via a trust could make sense until the children are of mature age.”
Don’t Give in to Lifestyle Creep
If you receive a pay raise, Hurley recommends following Warren Buffett’s advice. “Do not save what is left after spending, but spend what is left after saving.”
Instead of giving into lifestyle creep, like buying a new car or house simply because you received a raise, save the additional funds. While everyone wants to believe that more income will ultimately lead to success, Hurley said it is what you do with the income you make that ultimately makes the difference.
Stand by Sound Financial Habits
While it may seem tempting to try get rich quick schemes or panic at the first sight of volatility in the stock market, Hurley said this behavior will not help you build wealth in your 40s or at any age.
“Stand by your stocks as long as the fundamental story of the company hasn’t changed. Investor’s emotions are the ones that continue to move the markets,” Hurley said.
The key to reaching financial freedom, and building wealth, is to change your behaviors and develop consistent financial habits. History shows that those who do so will be rewarded accordingly.
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