5 money mistakes people make in their 40s

This is a decade where people can start to feel better off, with their finances on a more even keel when compared to their 20s and 30s. Many may be more established in their careers, which can come with increased pay. Those who started families in their early 30s, may see the heavy cost of early-years childcare start to reduce, or be able to return to more regular working hours.

This isn’t to say that it is all plain sailing financially. Growing families and bigger mortgages will stretch most people’s budgets, particularly in today’s higher interest rate environment. Others may be negotiating career changes, divorce, or only just starting to settle down. This is the decade when many people start to think more seriously about the long-term: what they want to do with their rest of their life, and how they will pay for it. Juggling shorter- and longer- term financial demands will be key to managing your finances in this important decade.

Below are five financial traps that are easy to fall into — with suggestions on how to avoid them.

• Get updates on markets, ISA funds, pension saving and much more

1. Failing to ensure pension contributions keep pace with pay rises

Many people in their 40s will be on far better pay than earlier decades. But make sure you use promotions and pay rises to boost pension contributions too.

Most workplace pensions take a fixed percentage of your salary as pension contributions, so a pay rise will mean more money going into your retirement savings in pounds and pence. But consider upping the contribution levels too. For example, if you get a 3% pay rise commit to paying an additional 1% of your salary into your pension. Your take home pay will still increase (by 2%) but you’ll see a more significant boost to your retirement savings, particularly as this percentage will be based on a higher basic salary. This strategy is doubly effective if you’re in a scheme where your employer matches your contribution level.

If you’re self-employed and save into a Self-Invested Personal Pension (SIPP) (or other personal pension), make sure you boost contributions when your profits increase. Many people set up a £250 or £500 a month direct debit and are still paying the same amount years later, even though they may now be on significantly higher earnings.

• Read: I'm self-employed - how much should I save for retirement?

2. Spending over the odds on childcare

For many parents in their 40s, the biggest outgoing after the mortgage is childcare costs. Help is available through the government’s tax-free childcare account. Parents get a 20% government top-up on savings paid into this account (regardless of their tax bracket), which can then be used to pay childminders, nurseries, nannies, au pairs, and after-school, breakfast, and holiday clubs — provided they are registered with the scheme. Parents can contribute up to £10,000 a year per child into the account, with a potential maximum top-up from the state of £2,000 per child.

The scheme is primarily aimed at parents with pre-school or primary-age kids (11 years and under). Parents with a child with a disability can claim up to the age of 16. However, previous estimates suggest that, while 1.3 million families are eligible for this scheme, around 800,000 aren’t currently signed up¹. To qualify, both parents need to be working, which can include self-employment, with neither earning more than £100,000.

Parents may be able to get other help towards childcare costs. For example, if their child is between three and four years old and they live in England, they can get 15 hours of free childcare a week for 38 weeks of the year. Some parents will be able to access even more hours of free childcare, so it is worth checking eligibility on the government-backed website beststartinlife.gov.uk 

3. Not expecting the unexpected

Life has a habit of throwing us curveballs — whether it’s redundancy, illness, divorce, the death of a partner, or even a global pandemic — all of which can seriously derail our finances. While you may not be able to prevent these things, having emergency savings and appropriate insurance, such as life insurance, income protection, and critical illness cover, can cushion the financial fallout from such events.

Building a financial safety net can be difficult when you’re younger and just starting a career, but this should be a priority once you have a steady job, a mortgage, and potentially a family. Financial experts suggest having emergency savings equivalent to three to six months' worth of take-home pay. Hopefully, none of these life-changing events will befall you, but these savings can ensure that your finances remain resilient in the face of more everyday disasters — from a boiler breakdown to your car failing its MOT.

4. Too much focus on current spending needs

People’s salaries often increase in their 40s, but this is often matched with higher spending. Some of this is inevitable: growing families necessitate larger homes, bigger cars, and ever-growing food bills from ravenous teenagers. But many people will also want to start enjoying the good things in life during this decade — be it exotic holidays, home improvements, or more stylish clothes to suit that promotion.

However, it’s easy to fall into the trap of ‘lifestyle creep’, where additional income is simply used to upgrade your lifestyle, without considering future financial needs. Instead explore ISAs and other savings and investment options. These can also help ensure that living standards are maintained if your income dips — so you don’t have to fall back on credit or debt if there is a future income shortfall. There’s nothing wrong with living the good life, but make sure it’s both affordable and sustainable.

• Read our guide on saving for retirement in your 40s

5. Taking on too much debt

People in their 40s tend to be more established in their careers, have higher incomes, and may have lived in the same property for years. This makes it easier to access credit, be it via a mortgage, credit cards, or personal loans, often at more attractive rates. This is also the decade when many take on more significant debts — often moving home or extending their current property or buying a more expensive car — while juggling the higher day-to-day living costs of family life.

A certain amount of debt may be necessary, but make sure you don’t over-extend yourself. As you progress through your 40s, start making plans to reduce overall debt. This might involve cutting back on credit card spending in the short term while having a longer-term goal to pay off the mortgage. It may be years, or decades before you are mortgage-free, but having a clear plan to get there can make a significant difference to longer-term retirement prospects.

For most people, the goal will be to clear their mortgage debt before they reach retirement. 

It can be difficult to know when to prioritise overpaying the mortgage versus paying more into your pension or saving for shorter-term goals. Read our article here on the factors to consider when weighing up whether to put your spare cash into the mortgage, ISA or pension: Overpay the mortgage, ISA or pension - which is best? Or watch this episode of the Personal Investor where I discuss the issues in more detail. 

• Watch: Mortgage, ISA or pension? What most people get wrong

Read more from our series:

• 5 money mistakes people make in their 20s
• 5 money mistakes people make in their 30s
• 5 money mistakes people make in their 50s
• 6 money mistakes people make in their 60s
• 5 money mistakes people make in their 70s

Source:

¹ MoneySavingExpert 03.09.24

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.