Common Mistakes That One Should Avoid in the 40s- Part 1
When you are in your 20 you feel you have a whole life ahead of you. You are carefree, full of energy with no liabilities. When you reach your 40s you suddenly realize you only have 20 years left of your earning life. There are a host of responsibilities including the education and marriages of your kids, the responsibility of your aging parents, and several mortgages like home loans, car loans, etc. Then you also have to think about your own retirement. The 40s mark a pivotal point in a person’s financial journey. The incomes are good and growing but then there are too many liabilities too. While you juggle between the various liabilities it's also the time to give a decisive push to your saving and investment plans to meet many of the big-ticket goals which don’t seem too far away now. What are common mistakes I should avoid in life in the 40s?
At this stage of life generally, people don’t have the scope of experimentation, and also the ability to rectify mistakes is restricted as there is limited time to make amends. Thus, you need to secure your financial health so as to have better twilight years.
To do so you need to figure out if you have made some errors that people normally do and if you did, rectify them ASAP.
Not investing Enough:
Off late in big cities, there’s a new way of life that has come up. Instead of investing for various goals, they insure themselves for everything. They then just pay the premiums for that insurance and blow up the rest in enhancing their lifestyle. They are of the opinion that as their loved ones are secure if something happens to them, they can afford the lifestyle they are leading.
Getting insured is good but your loved ones are only secured in case some mishap happens to you. What if you are hale and hearty which your loved ones will always want for you. Then you are doomed because you never invested in the major expenses like kids’ college education, their marriage, your retirement, etc. I am mentioning this as this happened with a person I know. He is in a good position and has a good salary. Till a few years back he was a happy man as he has insured himself for everything. But today, when his kids are going abroad for education, he is a worried man with tons of expenses ahead of him and barely any investments.
Not Investing in the Right Instruments:
Those who invest should do it with the right instruments. Having a portfolio of investments that is too safe may be a disadvantage when you are entering the phase of high income and savings growth. You still have time to retire and thus, should put your money in instruments that could give good returns like equity mutual funds, or direct equity rather than putting all money into debt instruments that are barely able to beat inflation.
Only the money that you need in the near future say in the next three to four years should be parked in the safe instruments. The remaining should be invested in instruments where it works hard to earn you better returns. If your savings are not working hard enough, it’s you who will have to toil and make up for it. The irony is however hard you try you can never be able to achieve what the power of compounding does for you.
The best way to build a solid base for your future is to adjust your investment plan once your financial security starts increasing in your 30s. Invest more in growth assets. For all those goals which have at least six to seven years to go, make the investment in equity an important part of asset allocation. This can be directly into markets if you have knowledge of it, or else through mutual funds. Start SIPs (Systematic Investment Plan) for that. SIP is a better way to invest in a disciplined manner month after month and it also helps in mitigating market volatility.
Buying Too Much Real Estate:
Most of those in their 40s are more into real estate. Owning one house is fine but having more as an investment is not a great idea. Understand that real estate is an illiquid asset and if you are in need of little funds it’s not going to help you. Also, the returns on real estate are in the form of rents which are not great. You get only 2-4% returns on your capital in the form of rent.
When your money is tied up in the real estate, you often take a loan to meet goals that don’t require the huge amount of money that you need to sell your real estate. On this borrowed money you pay interest which is north of 7.5% while your own money is stuck in real estate and is getting you only 2-3% returns.
There are a few more mistakes that people generally commit that prevent them from accumulating the required amounts for their goals. I will cover it over the next weekend in part 2 of this series. Hope you find it good and helpful. If you like it, please forward the link to your social circles so that it reaches the right audience who can benefit from it.