Let's talk about how to build wealth in your 40s. If you’re in your 40s or nearing this age group, you might be worried about building wealth for your future. According to CNBC, the average 401k balance for Americans between ages 40 and 49 is $120,800. This means that there is a large number of people who have less than this amount in savings.
Saving for retirement can feel like a bit of a double-edged sword. You’re told to start when you’re younger, but when you’re fresh to the workforce, you’re often making a low salary and have debts to repay.
The good news is once you reach your 40s and retirement is just around the corner, you still have plenty of options available to invest in your future.
7 tips on how to build wealth in your 40s
You might feel like you’re behind, but the most important step in saving for your future is to start today. Worried about how to build wealth in your 40s? Here are a few tips to help you maximize your wealth for the future.
1. Max out your retirement plans
Retirement is likely a major focus, particularly if you plan on retiring before you’re 65. The best way to grow your retirement savings exponentially before your 60s is to begin maxing out your retirement accounts.
If your workplace offers a retirement plan like a 401k, 403(b), or 457(b), you’ll also want to take advantage of any employer matches as well. If you're wondering, "should I max out my 401k?" you can max out both a 401k and IRA in the same year, as long as you meet the IRS qualifications.
2. Invest your money to accelerate building wealth in your 40s
Once you’ve automated savings to your retirement accounts, another way to grow your wealth is through investing. This is key when it comes to how to build wealth in your 40s. The way you invest is entirely up to you. If you’d prefer to invest in individual stocks, you can research and begin buying shares with an investment account. TD Ameritrade or E*trade are both top-rated, user-friendly platforms.
Keep in mind that this type of investing can be risky, so be sure you’ve thoroughly researched a company before investing. You’ll also need to stay updated regularly on market trends so you can make smart decisions for your investment portfolio. Of course, you can invest without having to take an active role in what’s happening on Wall Street.
Investing in index funds can allow you to buy fractional shares of the top-performing companies on the market. While you won’t earn as large of a return as you would if you invested fully in a high-performing company, you’ll be able to minimize your risk by spreading it across multiple top-rated companies. Popular index fund options include the Vanguard 500 and Fidelity 500.
3. Create a plan to pay off debt
Saving money is important when you’re looking to build wealth in your 40s, but paying down debt is also important. If you don’t want to worry about mortgage payments, credit card bills, personal loans, or other debt when you’re retired, create a plan to pay down your debt now.
You can employ the avalanche method and pay the minimum on all of your debt while focusing heavily on the debt with the highest interest rate. Once that one is paid off, turn to the next highest interest rate, and repeat the process until you’re debt-free. Alternatively, you could explore the snowball method of paying down debt. You do this by making minimum payments for all accounts, and focusing on the debt with the highest balance first.
Of course, you may not be able to pay down all of your debt right away. It could take years, particularly if you still have time left on your mortgage. It’s important to make a debt repayment plan, though, so you can keep yourself on track.
4. Reduce your spending
Saving as much money as you plan out how to build wealth in your 40s is important. Most especially if you don’t have much of a nest egg already saved. If you’re struggling to max out your retirement accounts or save more money, cutting back your expenses might help.
I recommend reviewing your previous month’s bank statement to understand how you’re regularly spending your money. Categorize your spending (rent/mortgage, utilities, bills, debt, groceries, gas/transportation, restaurants, miscellaneous shopping, etc) to learn more about your spending habits.
Once you understand where your money is going, see if there are any categories where you can cut back. This way you can ensure you are living within your means and then you can reroute funds to other savings goals.
5. Plan your estate
Having an estate plan is a smart way to protect your money and family. If you haven’t already worked with a financial expert to plan your estate, it’s important to take this step now. Setting up the right life insurance policy and arranging your financial affairs can help grow your wealth.
When it comes to how to build wealth in your 40s, it's likely that you have a family or dependents. An estate plan can ensure that your family is taken care of as well.
6. Create multiple income streams
Adding additional income streams is also a great way to boost your income and savings. Best of all, you don’t have to work nonstop in order to add additional income. Instead, try freelancing a few hours a week, working at a shop you enjoy part-time, or finding remote part-time opportunities.
7. Consider selling your house
If you purchased a home in your 20s and are more than halfway through your mortgage term, now might be a good time to sell. Many of us purchase homes with more square footage than we need, so selling and finding a smaller place to buy outright could save you hundreds each month.
You can learn how to build wealth in your 40s
Don’t panic if you’re in your 40s and just realizing that you don’t have enough saved to live comfortably in retirement. It’s not too late to begin cultivating your ideal future. Take a look at your finances, begin saving as much as possible, look for ways to grow your income, and cut expenses where possible.
Most importantly, don't get discouraged -- you still have plenty of time to save for retirement, so craft a plan and watch as your wealth grows.