A woman sits in a yoga pose outdoors and reflects on how to build wealth in her 40s.

7 Ways to Build Wealth in Your 40s

01/28/2021

Building wealth begins with a structured financial and money management plan at any stage of life. Here are 7 ways to build wealth in your 40s.

For many people, turning 40 marks a crucial inflection point, both personally and professionally. When it comes to financial planning, meanwhile, this period has its challenges. Many 40-somethings will need to balance conflicting goals, including saving for college while possibly paying off their own college loans, growing into a bigger house while helping aging parents, and enjoying the fruit of their hard work while saving for life after work.

Because many people in their 40s will reach their peak income during this decade, it is important to keep up with savings schedules. One general rule of thumb for retirement saving is to have one time your annual income saved by the time you are 30, two times your income by age 35 and three times your income by age 40.

Not quite there yet? Rest assured that it’s never too late to start. Here are some tips on how to build wealth in your 40s.

Max Out Your 401(k)

It might have been tough to go all in on your employer-sponsored retirement plan early in your career, but maxing out on your 401(k)—or an equivalent plan—should be a priority in your 40s. In doing so, you’re simultaneously reducing your taxable income and increasing your wealth on a tax-advantaged basis. The maximum amount you can contribute in 2020 is $19,500 per year if you’re under 50.

Spread Your Bets

Throughout your 30s, your investment portfolio might have skewed heavily toward high-growth stocks. While it’s important to continue growing your nest egg, this decade is a good time to revisit your investment portfolio and make sure you’re properly diversified.

True diversification isn’t just about having a mix of stocks, bonds and other asset classes. It also requires finding a balance of securities within those categories; for example, your stock allocation should include companies of different sizes, sectors and geographies. Doing so not only helps minimize the damage of market volatility, it makes it possible to take on more risk—and realize the potential for higher returns overall.

Load Up Your HSA

Healthcare could represent one of the single biggest expenses you face later in life, but you can get ahead with the help of the triple tax-advantaged investment savings of a health savings account, or HSA.

Anyone can open an HSA as long as they have an HSA-qualifying high-deductible health plan. The money you contribute is tax deductible, earnings grow tax free, and distributions used for qualified medical expenses are not taxed. Annual contribution limits for 2020 are $3,550 for an individual and $7,100 per family. Unlike flexible spending accounts, HSAs don’t need to be spent down each calendar year. In fact, it’s better if you don’t spend the balance and let it accumulate over time.

Lock in Even Lower Interest Rates

Interest rates have remained near historic lows for more than a decade, but in 2020 home loans have ticked still lower, recently hovering around 3% for borrowers with good credit and conventional mortgages. If you plan to stay in your house for at least a few more years, do the math on a refinance. In general, it makes sense if you can shave one percentage point off your rate, but do your own calculations to see how quickly you can break even after factoring for the cost of refinancing.

Purchase Cars Prudently

It’s important to keep tabs on small daily expenses, but that savings can easily evaporate with a single big-ticket purchase, such as a car. While cars can be a big diversion from building wealth, they are for most people in their 40s a necessity.

There are ways to get the comfort, save and safety of a luxury car without paying luxury prices. Keep an eye out for the projected lifetime repair costs of your prospective vehicle—the more exotic the car, the more exotic the repair costs. While it’s an old saying to never buy new, car buyers who shop around, know how to negotiate and opt for models that tend to hold their value might be able to strike a balance between the new car they want and a price tag they can afford.

Keep Kid-Related Costs in Check

It’s never too early to teach your kids a lesson in wants versus needs. As the lifestyle expenses for active teens increases, don’t let that derail your family savings and investment goals. The increasing costs for club sports, the latest fashions and mobile devices, for example, are all negotiable. Bring your kids into the real world by having them pay for a portion of the things they want.

The upshot: their true needs and passions will rise to the top, while capricious spending will drop off. Better yet, when it's time to start thinking about college, your kids will have a better grasp of how to weigh all of the factors that go into the decision.

Bank Your 2020 Savings

While Covid-19 has created many economic hardships, individuals who haven’t suffered a drop in income have an opportunity to take small steps toward building lasting wealth. Indeed, money saved not taking vacations, eating out or shopping as frequently can be put to work building an emergency fund or catching up on retirement. All told, a family of four could easily save $10,000 in a year by forgoing vacations, cooking at home and limited trips to the mall. While everyone is eager for life to return to something resembling normal, investing that at a 6% return can turn it into a $41,000 savings bonus in 25 years.

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