It's crunch time. You're at the height of your career and you probably have a couple of extra mouths to feed. Here are the 10 biggest money mistakes to avoid in your 40s and 50s.
1. Overspending. A bigger paycheque brings many good things – cars, holidays, a new house – but don't fall for the instant gratification trap. If you're, say, a 40-year old, then saving an extra $400 a month would add more than $300,000 to your portfolio by the time you retire, given a modest 7% return.
2. Not adjusting your emergency cash. You may be able to get away with having only a few thousand dollars in emergency cash when you're in your 20s, but that won't go very far if you have a family and mortgage to support. Be sure to adjust your emergency fund proportionally as your income and expenses grow. Aim to have at least four to six months' worth of living expenses set aside in a high-interest savings account.
3. Treating your mortgage as an ATM. Credit cards can do a number on you at any age. But if you own a house, you may find yourself staring down a new temptation – a home equity loan. It might make sense to use your home as a cheap form of credit to fund major expenses, refinance higher interest debts, or for investment purposes. But spending the equity in your home to give your lifestyle a short-term boost is not a good idea.
4. Leaving your home and contents insurance static. While we're on the topic of homes, when was the last time you revalued your home and contents to adjust your policy? As your wealth rises and inflation increases the cost of replacing valuable items, you may find the policy you took out ten years ago leaves you under-insured. That goes for life insurance as well, so make sure it has kept up with your family's lifestyle and expenses.
5. Counting on the government pension. While the age pension may provide for your basic needs in retirement, you won't be living a life of luxury. It's never too late to take responsibility for your financial future by starting to save and invest. ‘Compound interest is the eighth wonder of the world,' as Einstein reportedly said. Now's the time to really focus on what you want your lifestyle to look like in retirement and start working towards it. You can achieve a lot in 15-25 years.
6. Putting your kids' university ahead of your retirement. Helping your children financially through university can give them a head start in life and take some pressure off. If you can afford it, great. But don't neglect your own future. Not putting enough aside for your retirement now will make it harder to catch up down the track. Your retirement should be your priority and will mean you won't rely on your kids for handouts down the track.
7. Not diversifying. Having all your eggs in one basket is rarely a good idea. Owning a broad portfolio of stocks and other growth assets, such as property, is less risky and more likely to produce satisfactory, consistent returns over time (see The one thing all rich people buy). Even the most stable and high-quality companies on the ASX only get a 10% maximum recommended portfolio weighting at Intelligent Investor.
8. Panicking when stocks go down. Seeing your retirement portfolio drop 30% or more can feel horrible. But don't make the mistake that many did in 2009 by selling into the fear and then missing out on the market's recovery. Keep calm, focus on the long term, and remember Warren Buffett's timeless advice: ‘Be fearful when others are greedy, and greedy when others are fearful.'
9. Being too conservative with your portfolio. If you're 50, you might have another 30–40 years of life ahead, including 15 years before you retire. Having a more conservative portfolio relative to someone in their 30s makes sense, but consider that there has never been a 20-year period of negative stock market returns, whereas cash loses its value year in, year out due to inflation. Consider your investment horizon to ensure you don't allocate too much to fixed interest investments (to see how your portfolio stacks up, try out the 'HealthCheck' function in the InvestSmart Portfolio Manager after plugging in your time horizon).
10. Not taking care of your health. Medical expenses tend to grow exponentially with age. In fact, Medicare data shows that of all the money you'll spend on healthcare during your lifetime, 30% will be spent in your final six months. Investing in a good diet and exercise today should help reduce your future medical bills and keep you fit for longer.
For those of you in your 40s and beyond, what advice would you give to your younger self?