Common Mistakes That One Should Avoid in the 40s- Part 2
I have highlighted some common mistakes like not investing enough or not investing in the right instruments etc. that a person should avoid in the 40s. Today I will cover a few more.
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Undisciplined Spending
Most people in their 40s have steady incomes but they also have a lot of expenses. Their parents are getting old and their medical expenses are on the rise. Their own health problems are cropping up as many suffer from diabetes, high BP, etc. The kids’ education expenses also increase, and they have to arrange funds for their college education, marriages, etc. Most will be servicing mortgages at this stage and over and above all they want to spend more on their lifestyle. Thus, despite having a good steady income, a big chunk of it goes into meeting all these different expenses. The irony is that to meet all these, the savings towards important goals like retirement get compromised.
You need to understand that you have reached your 40s and your saving for this goal can’t be ad hoc anymore. If you don’t start saving for your retirement seriously and regularly now you won’t have enough corpus for your old age and the magic of compounding that will make this corpus grow won’t have time to work on it.
This problem is seen more with people in high-income brackets. They have money to take vacations abroad, dine in 5-stars or take a membership to an expensive club, etc. They also intend to buy costly homes and the EMI payments towards that eat away a major chunk of their salaries.
You need to figure out if you are having a high consumer loan or credit card debt. A credit card debt if not paid within the stipulated free credit period attracts an interest of 1.5%-2% per month which is a whopping 18-24% per annum. Such mistakes can hold you back from saving towards your goal as their repayment is a drain on savings and investments. Analyze your financial health and if you find that you have already committed this mistake make it a priority to pay down such high-interest debts quickly. Try to come out of it ASAP so that the savings can then be channelized towards your goals. Also, consider tax benefits available on certain loans like home loans, while deciding which loan to tackle first.
Not Prioritizing Goals:
This is often the most common mistake that most of us make. People in the early 40s can straddle between multiple goals but retirement is often the last in terms of time sequencing of goals. But when in your 40s saving for your retirement should be your immediate goal. Please don’t count on your children to look after your financial needs in your old age. If you are on the wrong side of the 40s and funds are scarce then retirement should stand taller than higher education for kids.
The education of children is definitely an important goal but for that, you should start investing when children are young. If you have fallen back on this goal for some reason, then prioritize catching up in this phase of life when income is high, but not at the cost of retirement. The children can opt for an education loan which also gives tax benefits for their higher studies and the responsibility of repayment can be shared by the children.
A strong trend is setting up in the higher middle class of sending children abroad for undergraduate education as against post-graduate education earlier. If you have not planned for it properly you will end up using investments that were earmarked for other long-term goals and this is not the wise thing to do.
You might be contributing towards your EPF but that alone might not suffice. Check the corpus you would require and access the contribution you have made towards it so far is adequate to get you there. If not, then this is the time to supercharge those savings and take advantage of the time still available for retirement. For most of you, retirement is still more than 10-15 years away so invest in growth assets like equity. As you move closer to retirement shift them to safer assets.
One more word of caution: Always keep the temptation to raid your retirement accounts, to meet immediate needs which include paying for education or repaying debt in check. If you fail to do that you will never witness the magic of compounding that works wonders in growing the corpus.
In this post, I have highlighted the importance of saving for your retirement. Some of you might not agree with it instantly but think over it rationally and you will realize the logic behind it. I will wrap up this series on ‘Common Mistakes That One Should Avoid in the 40s’ in my next post. Till then keep reading and sharing if you like it. I would also appreciate it if you can leave your valuable comments, queries, etc. as it will help me on how to take things further.