Building wealth in your 40s
While you may not be as invincible in your 40s as you are in your 20s—and possibly have a few extra responsibilities like kids and a mortgage—you’re probably in a more stable financial position than you’ve ever been.
So how can you continue to build this momentum to set yourself up for a successful future?
Generate passive income and build long-term wealth
Wouldn’t you love to wake up knowing that a flood of cash seeped into your bank account?
If you can afford to put some money away for a lengthy period, and are able to take on more risk to seek better long-term returns, investing in growth assets like shares and property can generate a passive income while building your wealth over time. A passive income is money earned without you having to work. It’s the best kind!
According to analysis by Credit Suisse, Australian shares have given their investors an average annual return of 6.7% per year since 1900.1 That makes Australia the second best performing share market in the world over 120 years.2
Generally speaking, shares outperform many other investments over the long term, meaning your chance of a negative return gets lower the longer you invest.
There’s also the benefit of dividends. If you invest in companies that pay dividends, you’ll benefit from the part of the company’s profits paid to shareholders (generally twice a year).
Note: as we’ve seen during COVID-19, companies can cut dividends when times are tough. But they tend to increase them when profits recover.
Owning an investment property is another way to generate a passive income stream -by tenants paying you rent.
Like shares, Australian residential property has delivered strong long-term returns. In fact, in the past 20 years to December 2017, it returned 10.2% pa.3
While less volatile than shares, residential property values change depending on supply and demand in the market. There are also high costs involved to buy and maintain one and it’s difficult to get your money out quickly—if you need to pay for an expense, you can’t sell off one bedroom.
Gain control of your debt
While many people understand the benefits of supplementing work-earned income with passive income, one thing holds them back.
For many people in their 40s, debt is an overbearing burden that never seems to lighten. Whether it’s the mortgage repayments or mounting credit card bills, debt is one of the big obstacles to investing for your future.
So if this is the case, you may need a debt management plan—one that’s realistic to follow.
If you have more than one outstanding debt, consider working out how much you can repay on each, based on the minimum repayment owing.
Alternatively, if you’re able to repay more than the minimum, look at prioritising your debts. You’ll need to think about the type of debt you have—an investment loan or personal debt—and how much is owing.
If you only have personal debt, you could prioritise repaying debts with the highest interest rate first, given these will be costing you the most.
At the end of the day, the approach you take is personal but it’s important to have a plan and stick to it. And that could mean making other changes.
Keep track of expenses and income
Having a clear picture about what you earn versus what you spend can highlight areas where you may be able to save.
Whatever income you’re able to save can then be allocated towards your debt. There are budget planners and phone apps you can use to track your spending. Alternatively, you can simply download your bank statements and keep a record of your receipts.
Make sure to include everything from your household necessities like rent or mortgage, utilities, kids’ education, what you spend on entertainment, etc.
Invest in your retirement
If you’ve still got a long way to go before retirement, it’s worth keeping track of your super’s performance. This may lead you to reconsider your investment approach.
There are also retirement calculators you can use to see if you’ll have enough saved to maintain your standard of living in retirement.
If you find youneed to make financial adjustments to increase your retirement savings, one option could be to contribute more to your super on a regular basis using your before-tax or after-tax income - there are tax benefits that come with this too.
For example, if you contribute some of your after-tax income or savings into super, you may be eligible to claim a tax deduction. This means you’ll reduce your taxable income for the financial year and potentially pay less tax, while adding to your super balance. It’s a win-win!
And you don’t have to wait until your mortgage is paid off to add more to your super either. Even small, regular contributions could make a big difference to your retirement savings.
Seek professional help
Getting independent advice from a financial adviser can help you design a financial plan that leads to passive income—super, shares, or property—that protects your lifestyle when you’re not working. Please contact us on 03 6165 2666 .
An often underrated element of advice is that it helps people do common-sense things—like investing long-term, cutting debt, and putting away cash now to make life easier later on.
1 Livewire: Australian sharemarket wins gold – 5 March 2019
2 Livewire: Australian sharemarket wins gold – 5 March 2019
3 ASX: 2018 Russell Investments/ASX Long Term Investing Report- June 2018
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