The first part of your life is generally also expected to be the most glamorous period of your life, (both personally and professionally) and financial planning for your last part of life is often the least thing on your mind, but hear me out…
Winter is coming, quite literally.
Winters in Scandinavia are long and dreary, tax rates are scary, and there is a terrible war going on. And on top of all that, the constant fear of recession clouds are weighing on the whole of Europe.
With the economic crisis looming over our economies, high energy prices and the highest inflation in four decades eating into household economies, it is about time that you get your finances back in order and develop financial habits that will insure your family and long-term goals.
But, first things first.
ARE YOU A UAW OR A PAW?
This famous concept from “The Millionaire Next Door” is an extremely valid concept to measure your financial health. The author, Dr Stanley, categorized people in the top quartile of wealth builders as Prodigious Accumulators of Wealth (PAWs) and people in the bottom quartile as Under Accumulators of Wealth (UAWs).
How does that work?
The authors define an Average Accumulator of Wealth (AAW) as having a net worth equal to one-tenth their age multiplied by their current annual income from all sources.
For example, if a 50-year person earning $250k P.A. doesn’t have $1.25 Million in net worth, they’re a UAW. Use the formula age*current annual income*10% to calculate your AAW.
Now, why is this important?
Dr. Stanley’s research showed that those in high-profile professions and corresponding high incomes often do not actually accumulate significant wealth. Most of their income goes to supporting their superfluous lifestyle habits. If you’re well in your 40s, it is much more important that you are ‘Balance Sheet Affluent’ rather than just ‘Income Affluent’.
But how exactly do you become ‘Balance Sheet Affluent’? By developing good financial habits.
From my experience of managing my finances for the past 30 years now, these are the top 4 financial habits that I recommend to my clients, especially those in their 40s:
1. Plan financial goals according to your personal and professional goals
This is the time when you have built a strong financial foundation, now you are at crossroads where you have choices but not too many choices.
40s is the best time to set Financial plans that support your future professional and personal goals. Ask yourself questions like,
- Do you have enough to sustain if you want to explore professionally?
- How far along are you in planning your retirement?
- Have you paid all of your high-interest debts?
Treat this checklist as a green or red flag for your future professional goals. If you have your finances in order, it will only be easier for you to venture into your professional aspirations without any financial noose around your neck.
2. Make bite-sized money goals
Money goals are important, doesn’t matter if you’re a UAW or a PAW.
The one money habit that I have developed over the years (and I am in my 60s) and that I am proud of is that I aimed for stars before I could for the moon.
I know that might sound contradictory, but with money, it makes sense. The farther away any goal seems, the more likely you are to get overwhelmed and give up. And your 40s are all about getting your finances in order and creating money habits that will reap in the second half of your life.
Aside from your big financial goals (like buying a second home) try setting smaller, smarter and short-term money goals, something like saving some money each week in order to take a trip in six months. Keep testing your limit and take it up a notch if you feel like it.
3. Keep a check on your asset allocation
What does good financial health look like in your 40s? Having a diversified investment portfolio.
What does excellent financial health look like in your 40s? Making sure that your asset allocation makes sense.
Asset allocation is the single most important investment decision that investors can make, especially after their 40s. If you are someone who has been actively investing since your 30s, now is the time you figure out whether your current asset allocation is in place or not. You want to make sure that it meshes well with the current stage of your life and your future personal and professional goals. This is what you need to keep an eye out for
- Make sure that there is no unnecessary overlap,
- your portfolio is properly diversified,
- your asset allocation is insulated against market volatility, and
- that 60% of your portfolio is equity.
Also, go for asset allocation only after a proper understanding of an investor’s risk profile, but keep in mind that someone in the age bracket of 25-40 years should consider equity as a major asset class for investment.
4. Reach out for help
Repeat this after me: It is okay if I don’t know the stock market like the back of my hand.
While I talked about proper asset allocation in my previous point, in this point I want to iterate that it’s better to hand off your money to professionals rather than impromptu IPO buyouts and funds because that won’t take you too far. So, what do you do?
Make the sensible decision of investing in low-risk options like ETFs and get a hold of professional services to ensure that your money has the opportunity to make the returns that the equity market offers.
Accept the fact that if by now you were not able to develop a knack for the stock market trading games that would have minted you a pot of money, probably now’s not the best time to risk your portfolio.
A Financial freebie:
Invest in your health
Now, this might sound bogus to some people considering the blog’s title, but trust me, your health choices can seriously affect your finances way beyond your 40s.
I am in my 60s and at my peak(both financially and professionally), and you know why? Because health was always my top priority. And if you develop good health practices early on in your 40s when you still have the chance, not only you’ll be doing your emergency and retirement funds a favour, but continue building wealth in the second half of your life.
Great financial habits are one step forward to leading a successful and balanced life. And that is what I have been practising for a good amount of time now.
Good money habits ultimately put you in complete control to make thoughtful decisions. How?
Smart financial choices don’t only help you lead a comfortable lifestyle, but back your professional and personal ambitions later on in your life. Developing such little financial habits in your 40s lays a foundation for a long-term plan.