Day: January 28, 2020

Looking at our finances at first, I could not tell if we were even on track for retirement while we keep on working towards saving all these years. But, how should my finances look like in my 40s? How much savings should I have by now in order to reach our financial goals?

I figured I better create a checklist to make sure we actually meet some of the critical milestones before we get too far off track. And hopefully, this list can be helpful to others who wonder about similar questions as well.

Pay off high interest debts or student loans

Did you know that the average interest rate for credit cards is 17.3%? That is a very expensive debt. Especially when compared to national average savings rate of 0.09%, according to the FDIC. If you still have high interests debt (other than mortgage), you should first try to eliminate it as fast as you can. Hopefully, by age 40, you have paid off all of your student loans already.

Most credit cards charge compound interest rates. If you pay your balance in full every month, there is no interest.

However, if you carry a remaining balance at all, the interest is calculated based on the entire balance of the month even though you paid it down and it starts compounded daily from the day of the purchase, not just after the due date.

Compound interest accrued daily, instead of 17% annually, interest compound based on the balance at the end of the day. As a result, the total interests is actually costing more than you thought.

So, pay off credit card balance in full every month to avoid interest. Also, make sure you have auto payments scheduled prior to due date to avoid late penalty fee. And, to set yourself for long term financial success when you hit 40, first pay off any debts, student loans and credit card balances and continue on good credit card habits.

Set aside a solid emergency fund

The rule of thumb is to have 3 to 6 months of living expenses covered when it comes to saving in emergency fund. I think that’s a reasonable benchmark for young couples.

For a family with multiple children, I think a minimum of at least 6 months is needed because for an unexpected event like a layoff or job loss, it may take at least 6 to 9 months to get a new job while you still have a mortgage to pay. Let’s be honest, getting a new job is only going to become more difficult for middle aged people and once we reach 40 and beyond.

With the said, how much of emergency fund is enough really depends on each household since everyone’s lifestyle, living expenses, financial obligations, geographical locations, stage of lives, health are all so different. You should do what you and your family is comfortable with and always have a backup plan.

Contribute towards retirement savings

If you didn’t start saving for retirement from when you were 25 or 35, it is still not too late to start now.

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