How to Build Wealth in Your 40's (It's Never Too Late to Learn)
July 25, 2022
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If you weren't able to build wealth in your younger years, you might wonder how to build wealth in your 40's. Is it too late? Do you have to give up everything, so you have more money to save?
Fortunately, it's not too late with the help of good money habits. We help you understand what you must do to build wealth in your 40's and still enjoy life below.
What Is Wealth?
Wealth is the total of all your assets, aka your net worth. It can include any assets such as stock market investments, real estate investing, savings accounts, and any retirement savings you already have. From your assets, you'll subtract your liabilities like your mortgage payments or consumer debt to arrive at your total wealth.
Level of Wealth: What Should Your Net Worth Be in Your 40's?
The general rule is to have two times your annual salary saved by the time you are 40. So, for example, if you make $100K per year, you should have $200K saved. Don't worry if you are nowhere near that number yet. It's never too late to build wealth.
How to Make Your Money Work for You
The good news is wealth building strategies don't mean you have to get a second job or work overtime. Instead, there are ways to make your money work for you. In other words, you can earn passive income by choosing the right investments and ways to keep your costs down.
The earlier you begin saving, the more your money will grow, but even in your 40's, there are many ways to compound your earnings fast to reach your financial wealth goals.
How to Build Wealth in Your 40's
Learning how to build your wealth level in your 40's means changing your lifestyle, spending habits, and how you save.
Before you learn how to grow wealth, you must get as close to debt free as possible. Debt reduction is a start, but entering retirement debt-free is ideal.
No investment portfolio will outearn the interest rates you pay on debts, especially credit card debt. So investing or saving money instead of paying off your debts is pointless. Rather, you'll pay out more than you earn, leaving you without as much money as you think you're making.
Lowering your expenses can put more money in your pocket, leaving more money for your savings goals. However, you might have higher living expenses than you realize. Review your bank statements from the last few months to figure out how much you spend monthly.
Total the expenses you pay and see where you can cut expenses. Then, prioritize your spending in each category. For example, housing expenses, food (grocery), and medical expenses are all necessities. Other expenses, however, like dining out, entertainment, excessive shopping, or other unnecessary spending habits can lower how much you have to save in an investment or retirement account.
If your kids are grown and you still live in the house you raised them in, you might save money by downsizing. Think about what you use the home for and if the space you have is necessary.
If you downsize, you can use the equity earned in the home to buy a smaller home, leaving you without mortgage payments if you can pay cash for the home.
You might consider keeping your primary residence and using it as a rental property. The monthly income can supplement your retirement savings, helping you build wealth even faster.
Pay More on Mortgage
Creating wealth sometimes means paying your expenses down faster, such as your mortgage. For example, if you pay extra toward your mortgage principal, you decrease the total interest you pay over the life of the loan.
For example, paying even $100 extra toward your mortgage could knock thousands of dollars of interest off your loan and help you pay the mortgage off a few years early. This puts a few thousand extra dollars in your investment account, helping you build wealth even faster.
Avoid Lifestyle Creep
Letting your expenses increase each time you get a raise or start a new job is easy. When you suddenly have more money, you might think it's okay to buy a new car or put an addition on your house.
Beware of doing this! Focus instead on saving the extra income. Sure, you could reward yourself for the raise, but don't make it so extravagant that you don't have extra money to put toward your retirement plan and financial wealth.
Multiple Income Streams
Millionaires have seven income streams, so why not add a few to your income? You don't have to worry about working sun up to sundown either. Freelancing and other passive income opportunities allow you to work when you want, supplementing your income and building wealth.
Whether you start a freelance gig doing something like writing, tutoring, or transcribing, or invest in a rental property and earn rental income, you can increase your income streams. This leaves more money to use your investment strategy to build wealth.
Maximum Contributions to Retirement
Make sure you contribute the maximum contribution to your retirement plans, especially if your employer offers an employer match. For example, if your employer will match the first 3% of your salary and you make $100,000, you should contribute at least $3,000 to get the free money.
Ideally, you should contribute the maximum contribution allowed by law for each of your retirement accounts to give your money more time to grow.
Don't put all your eggs in one basket. It's too risky. For example, what happens if your retirement accounts are all invested in stocks and the stock market crashes?
You lose everything.
Create an Estate Plan
Creating your estate plan in your 40's is a perfect time. While no one likes to think about death, planning is essential.
Work with a financial advisor to create a strategy to pass your financial wealth to your loved ones with as few tax liabilities as possible. This is also an excellent time to consider life insurance and naming beneficiaries so your loved ones have the money needed to handle your estate.
Maintain Emergency Fund
An emergency fund is essential when you're building wealth. If a crisis occurs and you don't have money set aside, you'll have to dig into your retirement accounts to cover the costs. This decreases your retirement money and could also cost you an early withdrawal penalty.
Your emergency fund should have three to six months of expenses to get you through even the worst crisis.
Utilize Your HSA
A health spending plan is a great way to save money with tax advantages for your future health needs. You can open an HSA if you have a high-deductible health insurance plan. For example, in 2022, you can contribute up to $3,650 yearly if you're single or $7,300 for families.
You don't have to use your HSA funds each year. Any money you don't use carries over into future years. The funds grow tax-free, and if you use the money for medical bills, you don't pay taxes on the earnings either.
Building Wealth in Your 40's FAQ
How Can You Be Sure You're on the Right Track to Your Wealth-Building Goals?
The best way to ensure you're building wealth in your 40's is to monitor your spending habits, lower your living expenses, use as many debt reduction techniques as possible, and work with a financial advisor to ensure you reach your goals. Of course, there's no right or wrong way to wealth creation. As long as you are consistent and strategic with your financial planning, you'll be on your way to reaching your retirement savings goals.
How Much Should I Have Saved by the End of My 40's?
You should have three times your salary saved by the time you are at the end of your 40's. While this sounds like a lot, you can reach your goals with passive income streams, diversification, and solid investing strategies.
What Are the Best Assets That Make Money?
The best assets to make money are those that fit within your risk tolerance and timeline. No two people have the same investing goals. For example, you may want to retire by age 55, while your neighbor may want to work into his 70s. The earlier you retire, the more money you'll need, which means you'll need to invest in more aggressive assets than someone with a longer timeline.
The Bottom Line: How to Accumulate Wealth in Your 40's
Learning how to build wealth in your 40's isn't as hard as it seems. It comes down to creating positive financial habits and focusing on your retirement savings so you can be entirely debt-free in retirement. Then, with a few simple changes and a focus on the future, you can achieve your goals of building wealth. Learn more by signing up and visiting our blog.
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