How Should I Evaluate My Financial Priorities In My 40s?
Written by Joe Snyder

Thursday, January 21st, 2021

Q: What should my financial priorities be when I'm in my 40s?

A: Your priorities are going to be individual to your unique situation at the time, but there are a few things you can do to ensure you're on track.

Whether there's any validity to it or not, the age of 40 seems to be one of those milestones in life where people start evaluating where they're at – financially, relationship-wise, and so on. Some people decide to make decisions like buying that motorcycle they've always wanted, or going on that dream vacation. But financially, what are the important things to focus on? Here are my thoughts.

In your 40s, you're halfway into your career and your salary is likely increasing. You want your focus at this point to be on building wealth (your net worth). Here are five things to make sure you prioritize in order to maximize your ability to build your net worth:

1. Make sure your debt is manageable. Ideally, you don't have any high interest rate (credit card) debt. Hopefully your only real "debt" is your mortgage, if you're a homeowner.

2. Have a fully funded emergency fund. This one's very important, and is often related to the previous recommendation. That is, if you don't have a dedicated emergency fund, if and when there's a fairly significant unplanned expense, you don't want to have to go into debt to pay for it. A Tax-Free Savings Account is a great place to keep your emergency fund.

3. Have your retirement savings well under way and automatic. Two really smart ways to maximize value here are to:

  • Take full advantage of any employer-sponsored pensions or group retirement plans your company may offer (never turn away free money from your employer), and
  • Make sure to shelter your investments from taxes as much as possible. RSPs are great for generating tax refunds and are still my go-to for retirement savings. TFSAs offer more flexibility in withdrawals, but for that reason, are also a bit more dangerous, since the money is so accessible. Both are great options.

4. Understand what you're invested in and have an appropriate mix of investments (asset allocation). One of the most important factors that determines your long-term portfolio performance is having a proper asset allocation. If you're too conservative, you might not be able to reach your goals without reducing your expectations or delaying retirement. If you're too aggressive, you can lose more than you need to. One helpful rule of thumb here is to use the 100 – age rule, which basically says that your retirement savings should be split like this: Hold a percentage of bonds that's equal to your age, and invest the rest in stocks. So with this rule, a 40 year old's portfolio should roughly be 60% stocks, 40% bonds. The result of this is that as you age, your portfolio naturally becomes more conservative.

5. Minimize investment fees. This is the other extremely important factor in your portfolio's long-term performance. Reducing your investment fees by 1% can literally save you 10s or 100s of thousands of dollars – meaning you can probably retire a year or two earlier! Index based funds and ETF portfolios are some of the smartest low-cost investments you can choose. Make sure you understand what you're currently paying in fees. In my experience, many investors aren't even aware of the fees they're paying, so that's a great place to start.

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