For most of us, 40-50 years of age would be the mid-point between the time we start earning and the time we plan to retire. During this stage, most of us have stable income coinciding with the financial obligations for achieving big-ticket goals. So, any financial mistake we make during this phase can adversely affect our preparedness for a stable financial future.
Here are four common financial mistakes individuals in their 40s should steer clear of.
Not increasing your emergency fund
An emergency fund acts as a safety net that can be used when dealing with unforeseen financial situations or for meeting unavoidable expenses caused during periods of illness, disability or job loss. Given its purpose, it should be adequate enough to cover your mandatory expenses for at least six months – utility bills, insurance premiums, loan EMIs etc. Not having this back-up fund in place may force you to avail costlier loans or liquidate investments set aside for achieving crucial financial goals. Similarly, the possibility of defaulting on loan EMIs would be relatively higher if you do not have sufficient funds to clear the dues on time. It may also attract higher penalties and pull down your credit score. Park your emergency fund in liquid instruments such as higher yielding savings accounts or fixed deposits.
Prioritizing child’s higher education over retirement goal
It is natural for us as parents to provide the best available higher education to our children. With steep inflation in the cost of higher education, parents, especially those in their 40s, focus more on investing to create a sufficient corpus for their child’s higher education. However, the higher education corpus should not be prioritised over post-retirement savings.
Rising life expectancy, steep inflation in healthcare expenses and growing acceptance of nuclear families make it equally important for you to save enough for your post-retirement goals. While salaried individuals are usually covered by provident funds, maturity proceeds may not be enough to outlast the post-retirement life span. Moreover, as most of the retired individuals do not have access to regular income, lenders usually desist offering loans to people above the age of 60. On the contrary, parents can always avail education loan for funding their child’s higher education, which then can be repaid by their children once they start earning.
Use online retirement calculators to find out the monthly investments required for building your post-retirement corpus. Any monthly surpluses left after the retirement contributions can be invested for accumulating your child’s higher education corpus.
Also read: Short on money for overseas education? Here’s how you can raise funds
Not buying adequate insurance cover
The optimum term insurance cover for any working individual should be equivalent to at least 15 times her annual income. However, just like most young earners, those in their 40s often confuse insurance with investment. As a result, they end up investing in money back plans, endowment policies, etc. offering inadequate life cover and generating sub-optimal returns.
Buying adequate life insurance cover for comparatively lower premium is best done via purchase of term insurance. You must also buy sufficient health insurance to protect yourself and dependent family members from rising medical expenses. As insurance premiums continue to increase with advancing age, prioritise purchasing term life and health insurance policies as early as possible.
Not investing in equities to meet your long term financial goals
While participation of retail investors in equities has significantly increased over the last few years, many in their 40s continue to avoid equities in meeting their long-term financial goals. Instead, they prefer to invest in fixed income instruments such as bank fixed deposit, public provident fund (PPF), NSC or other small savings schemes to achieve their long-term financial goals.
However, you must note that the post-tax return generated by fixed income instruments barely manages to match the inflation rate. On the other hand, equities as an asset class tend to beat both fixed income assets as well as inflation by a wide margin over the long term, especially for investment horizons exceeding 7 years. Hence, you must not ignore investing in equities.