Secure Your Future Retirement By Avoiding These Missteps in Your 40s

The following post is by MPFJ staff writer, Melissa Batai.  Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food.  She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.

When you’re in your 40s, you may begin to feel a great deal of financial pressure.  Your children are growing up, and the expenses associated with that begin to pile up.  You may find yourself shelling out money for more expensive extracurricular activities, higher grocery bills thanks to your children’s endless appetites, car payments so your children can begin driving themselves, car insurance payments, and college tuition.

As if that is not enough to put a strain on your budget, this may also be the time when your aging parents need more support, both financially and physically.  You may be helping them out monetarily or helping them out physically, which may mean less time at work for you as well as less income.

This decade, more than any other, is the one where your choices can make or break your future retirement.  This is partly because if you make a mistake financially in your 40s, there is not much time to recover financially, unlike mistakes you may make in your 20s when you have four or five decades to recover before retirement.

In your 40s, be careful to avoid these financial mistakes:

 

Refinancing Your Home and Extending the Life of Your Mortgage

Refinancing your home for a significantly lower interest rate is a smart money move.  However, too often, people refinance to lower their interest rate, but then they also extend the life of the mortgage.  True, this can reduce your monthly payment, which may offer you financial relief now, but it can later wreak havoc with your finances and your target retirement date.

Let’s say you bought a house when you were 35, and you pay on the loan for 10 years.  You are now 45 and have just 20 years left on your loan; you would own the home free and clear at age 65.  This works out rather nicely as 65 is a time when many people retire.  However, if you refinance at 45 and extend the loan back to the original 30 year term to lower your payment and create some financial breathing room in your budget, your home won’t be paid off until your 75.  This can cause quite a strain in retirement.

Many people do not have enough money set aside in their retirement account to comfortably cover a house payment, especially as medical expenses typically increase as you age.

You may say that you won’t retire until the home is paid off, but you can’t always control that.  Sometimes medical issues make retirement come earlier than planned.

 

Taking Out a Home Equity Loan

When you feel a financial crunch, your first thought may be to tap the equity in your house by taking out a home equity loan.  After all, the interest rates are usually much lower than a loan you can take out at your bank or a credit card.  You can also extend repayment time, often to 10 or even 15 years, which is typically not available on a loan that you get from the bank.

However, if you’re unable to make your home equity loan payments, you can lose your house just as you could if you weren’t able to make your mortgage payment.  In addition, if your home loses value during the time you’re repaying your home equity loan, you may find yourself underwater, meaning you owe more on the house than the house is worth.  If you need to sell during this time, you would need to pay the difference between the current value of the house and what you still owe between the mortgage and the home equity loan, which is often tens of thousands of dollars.  Too often, people who are underwater are unable to even put their home on the market because they know they won’t be able to generate the money needed to pay off the house loan when they sell their house.

 

Taking Out a Student Loan for Your Child

When your child is ready to attend college, you may feel a natural instinct to help him.  College is expensive, and you may not want your child saddled with student loan debt.  However, there are plenty of alternatives to taking out student loans for your child.

First, let your children know, from the time they are in upper elementary school, that you will not be able to help pay for their college education.  (Does this sound too harsh?  Trust me, your children will be glad when you’re retirement age and have enough money to take care of yourself because you made saving for your own retirement a priority.  Your children will be glad that you are not their financial responsibility, especially when they’re just starting out.)

By letting your children know this early, they can pick local colleges that will be cheaper, they can apply for scholarships and grants, and they can save money themselves for college.

Yes, if you don’t take out loans for your children, they will probably have to take out student loans themselves.  Remember, they are the ones who may qualify for loan forgiveness based on their career.  That will never be an option when a parent holds student loans.  Also, children with student loans can choose an income-contingent based repayment plan; parents can’t.

The government takes very seriously defaulting on student loans and will recoup their money if you stop paying.  “Federal payments to borrowers who have not made scheduled loan repayments can be withheld to repay the loan, including tax refunds and Social Security retirement or disability benefits” (US News).

Finally, if you don’t take out student loans for your children and you’re doing well financially and saving enough for retirement, you can always choose to help your children pay down their student loans faster.

Simply put—don’t take out student loans for your children.  Just don’t do it.  You and your child will be glad you didn’t twenty years from now.

 

Raiding Your Retirement Account

Once you start to amass a fair amount in your retirement account, you may be tempted to tap into that account when you hit a financial bind, which is likely in your forties.  However, there are significant drawbacks to raiding your retirement fund.

First, you lose the ability for the money you withdraw to continue generating interest and growing your nest egg further.

Second, you’ll need to pay a 10% penalty for withdrawing the money if you’re under the allowable age.

Third, the money that you withdraw will count as taxable income on your tax returns, so you’ll also need to pay taxes in addition to the 10% penalty.

Your 40s can be the time when you secure your retirement funding and can begin to plan for a relaxing, enjoyable retirement.  However, as you face dual financial stress in your 40s from increased financial needs from your growing children and your aging parents, you may feel pressure to find more money to infuse in the budget.  This pressure can lead to any of the above unwise financial decisions that can derail your retirement plans and lead you to a difficult financial position in your 60s and 70s.

How about you all? What financial moves do you suggest people in their 40s avoid to keep their future retirement secure?

Budget and the Beast – Can They Really Work Together?

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The following is a guest post by fellow blog reader, Mr.CBB, who is the voice behind Canadian Budget Binder. His motto is that, “It’s not about how much money you make, it’s how you save it.”  

Mr.CBB shares budgeting tips, frugal lifestyle, relationships, recipes, parenting, personal finance and so much more for his over 4500 fans all around the world. After all “money is money, debt is debt” no matter where you live. Come join him on Facebook, Twitter, and Pinterest. Enjoy!
Putting a budget together for us was the easy part, but the beast not so much. The beast, in this case, is our personal finances, so in other words, the money. Can we really make a budget work with the money that we bring in each month?
As a newly married couple going back a few years now we hadn’t really thought about using a budget. We didn’t have much debt except for paying our every day expenses. It’s not like we have never had debt in our lives, we just never felt the need to track it because we thought we were so good with money. That was our first mistake.

A Budget Is Not For Everyone 

That’s right, and I used to think I didn’t need a budget because I could tally up all the people I owed money to in my head. Heck, it was simple to save money as long as I spent less than I earned, so who needs a budget?
I needed a budget, that’s who, and shortly after getting married, we knew we would have to put a budget together. We not only had a mortgage and bills to worry about together as a married couple, but we also had 2 incomes and plenty more responsibility than when we rented.

Living in the UK

When I lived in the UK, I owned my first house (which was a flat) at the age of 21. What I bought was not a house, rather, it was comparable to a condo or a fancy apartment.
It wasn’t a million dollar mansion, but it was my little kingdom and I owned it. I didn’t need to have 3 bathrooms and a kitchen fit for a king. If the flat had four walls, a proper kitchen, running water, and a toilet that flushed, I was chuffed.
From there, I sold my flat and bought a 600sq ft house. Now, I know you are thinking it was small, and it was, but it was perfect for me. Considering the cost of real estate in the UK (which is very pricey in some areas), I didn’t think I did too badly.
When I moved to Canada, I don’t think I was prepared for all the expenses that were coming my way with new laws and regulations, taxes, insurances, and home repairs. There are many things about housing in Canada that differ from the UK, and I needed to get up to speed.

Dreams

I’ve always believed that if you have an opportunity to do what you love, don’t give up on your dream. My dream was to go back to school to learn something new, and I did just that, as scary as it was for me.
When it came time to buy our house (after much deliberation of whether we should rent or buy a house), it meant we needed to work together to get our finances on track and the money working for us.

Paying Off the Mortgage

Not only did we want to design our own budget, but we wanted to kill our mortgage as fast as we could. We saved for a nice down payment on our Canadian home, which gave us a head start in the mortgage payoff game.
We are both demons when it comes to owing people money even if it is just the mortgage. We’d rather work hard, play tough, and reap the rewards along the way. The budget was set up to help us speed up the mortgage pay-off process.

Tracking Expenses

No more guessing how much money we had left or scribbling notes on paper. Instead, we designed our own 10 step budgeting series and budget spreadsheet. When we bought our house, we paid $265,000, which left us with a mortgage of $185,000 to pay off.

Mortgage Freedom 

It may not sound like a lot, especially with today’s low interest rates, but you can imagine how much money in interest we are paying. That was enough for us to get serious about our mortgage.
This was a huge debt for us, so we worked hard to save as much as we could to balance the budget and pay extra pre-payments on the mortgage. We have also been investing in our retirement funds along the way.
Sure, we haven’t invested to the max, but now that it’s 2013 and only 4 years since we bought our house, we will be mortgage free hopefully by June. That’s the plan at least for now, which leaves us plenty of time to put money into our RRSP’s and other investments.
Some people have their own reservations about paying the mortgage off and would rather invest, but I say just do what feels right. A friend of mine always reminds me to make sure that I diversify my portfolio, so that is the plan.

How the Budget Helped Our Mortgage

Knowing where our money is going each month and how much we can spend to reach our goals has helped us to save more money. Make informed decisions and talk to a personal finance advisor for help if you need guidance.

So, can the budget and the beast work together?

You bet they can, and here are my tips on how to make the budget and the beast work for you like it has for us.
  • You need to get organized
  • You need to commit to the budget
  • You need to re-visit the budget often
  • You need to evaluate what works and what doesn’t work for you
  • You need to understand the process in order for it to succeed
  • You need not give up when you fall
  • You need to invest in yourself and financial literacy
So, although some people may think a budget is for people on low incomes or who are heavily in debt, think again. There’s no business that I know of that runs its organization without an accountant, so why should you run your household without a budget?
Don’t let the beast rule your budget. Take control of your money and know where, when, why, and how you are spending it each month.

How about you all? Do you have a budget that you track/follow each month? If so, how do you track it?

Do you ever find it hard to make your finances actually fit within your budget?

Share your experiences by commenting below!

***Photo courtesy of http://upload.wikimedia.org/wikipedia/commons/9/9b/-_Money_01_-.jpg

3 Tips To Pay Your Home Off Sooner

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The following is a guest post. Enjoy!

If you’ve considered buying a home but haven’t taken the plunge yet, one of the scariest things about it can be the time frame you’re looking at. Whether it’s your first home, a new home, or just a frustration that your current home is taking so long to pay off, let’s talk about a few steps you can take to pay off your home sooner.

Understanding Compound Interest

A friend once said that your first mortgage payment probably only buys you your front door. He meant that at the beginning of a mortgage, almost your entire payment goes towards interest. The idea of building actual equity in your home a few hundred dollars at a time can be pretty disheartening.

The real problem is that pretty soon, you’re going to be paying interest on your interest. If you haven’t done this math before, let’s take a brief example.

On a $200,000 loan, let’s say the current mortgage rates are about 3%. 3% of $200,000 is $6,000. But, that’s just for one year. Over the life of your mortgage (say 20 years), you’ll end up paying over $65,000 in interest!

But, compound interest also works in your favor. The earlier you put additional money down on your home, the more years you save paying the interest on that portion. For example, if you pay a lump sum of $10,000 in your 10th year of your mortgage, you’ll pay off your home about a year and a half sooner than you would have otherwise.

If, on the other hand, you pay that $10,000 on the FIRST year you own your home, you’ll own your home about two and a half years sooner. It’s the same amount of money, but you cut an entire extra year off of your mortgage.

1. Accelerated Payments

Your bank probably offers accelerated bi-weekly payments. By paying half your mortgage payment every two weeks, you’re actually making 26 half-payments per year instead of 12 full payments. That’s the same as an extra month’s payment every year. It’s automatic, you’ll never even notice it’s happening, and this alone will take a couple years off your mortgage.

2. House First, Furniture Second

Don’t fall into the trap of buying new furniture and renovating every room when you first move in. Remember – every extra dollar counts, so take a deep breath and spend a year or two living with your old stuff and pay the house down first.

3. Lump Sum It!

Bonuses, tax refunds, and other found money should all go towards your home. Lump sum payments really contribute to knocking down the principle and will save you a ton in interest down the road.

Have fun playing with the numbers and realize the power that decisions you make now will have over the life of your mortgage.

How about you all? Do you think it’s a good idea to try to pay off your home loan as soon as possible? If so, what strategies have you implemented successfully to meet this goal?

Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/surf98/400887772/sizes/l/in/photostream/