Do you ever feel jaded in your 40s? Nothing seems to excite you as much. Here is when a midlife crisis often rears its ugly head and starts wreaking havoc. People tend to navigate this transitional phase with mixed feelings.
Both men and women realize that their primary roles in the family dynamics are changing. Their elders will need caregiving while their kids become more independent. This will also change their financial commitments tremendously based on decisions they made in their late 30s. In playing catch-up or finding relevance, those in their 40s are prone to make emotionally-driven financial decisions that they will later regret. Understanding what mistakes could happen will help better prepare you for when you are faced with emotions or circumstances before it is too late.
Not having enough liquidity for emergencies
People in midlife have a higher chance of facing emergencies. This ranges from health problems to property repairs to family commitments. Most people find themselves drowning in debt as they firefight these challenges hurling toward them. This causes them to set their vision off maintaining the emergency funds. According to the Credit Counselling and Debt Management Agency (AKPK) – an agency under Bank Negara Malaysia, a financially healthy family needs to be capable of paying at least six months of their expenses from their emergency fund. If you have not done so in your 30s, have one specific bank account which will be used for emergencies. Setting up an auto-debit facility could also help you make the transfer effortless.
Allowing emergency funds to fall behind growth and expenses
Setting up your emergency fund is just the first part of the effort. As time goes on, your expenses might grow. You need to ensure that your emergency funds continue to match your budget. Your 40s is a crucial period to maximize the growth of your emergency funds. This is because most of your expenses will occur here: children need to go to school, you have accumulated debt to afford your home and car, and you may need to take care of your older loved ones. You have not included any out-of-pocket expenses which you may incur during this period. Revise the amount you set aside periodically to ensure that your emergency funds can cushion these expenses.
Becoming complacent about household debt
Accruing household debt is seen as part and parcel of life. Most of us will only be able to purchase our homes and cars with the help of mortgage facilities and hire-purchase facilities. In addition to that, we may have accumulated a bit of credit card debt as well. By your 40s, you must already be mindful of how much debt you have. Poor spending habits could draw you into a vicious cycle with growing interest rates putting a strain on you and your family.
Not buying adequate insurance coverage
Insurance remains an important risk protection instrument. Yet, according to the Life Insurance Association of Malaysia (LIAM), only 54% of Malaysians have any form of insurance coverage by 2020. Some avoid insurance because of a past bad experience or product misunderstanding. Health insurance, especially, would be able to help cushion major medical expenses. Even though Malaysia’s healthcare system is heavily subsidized, some advanced treatments may still be costly for patients.
Not diversifying investments
There is a famous saying used in investment: “don’t put your eggs into a basket”. The idea behind investment diversification is that should one investment lose money, the other investments would make up for those losses. Diversification does not guarantee that your investments won’t fall in a bearish market. It can improve your chances of not losing money, or that if you do, you would not lose as much as when you are not diversified. This is not limited to asset classes. Within the same asset classes, consider adopting a balanced approach by putting your investments in low or moderate-risk level options. Have conversations with personal finance professionals who can best advise you to navigate investments. They may present to you the pros and cons of these different options. With balanced information, you may make better decisions.
Overinvesting in fixed income instruments
Overinvestment is when you invest more money or resources than necessary. In corporate finance, NASDAQ uses this term when it refers to managers not acting in the shareholders’ best interests by investing too much – especially in potentially negative net present value projects. The same may be applied to retail, or individual, investors. Putting too many funds in low-risk instruments like fixed deposits or funds returning below the inflation rate could be unprofitable for you in the long run. Again, speak to personal finance professionals to evaluate whether you are at risk of overinvesting in fixed income instruments. Discuss with them your goals and circumstances so they can have a better picture of how best they can advise you.
Putting a child’s tertiary education ahead of retirement savings
As a parent, it is normal to give our children a higher education. However, putting your child through tertiary education while neglecting your post-retirement savings is a bad idea. Without denying the importance of a diploma or degree in today’s marketplace, remember that after their graduation your child will grow up and may find work to support themselves. Apart from private colleges, consider programs that impart trade skills. Some of these institutions like the Institusi Latihan Kemahiran Belia & Sukan (IKBN) under the Ministry of Youth and Sports or the Industrial Training Institutions (ILP) under the Ministry of Human Resources as alternatives. Remember that they have years ahead of them where they can earn a better living. Avoid financing their post-graduate studies unless you already have the means. When you are in your 40s, you are much closer to retirement age than they are; don’t forsake your retirement savings which are meant to help you later in life.
Midlife is a period that affects you mentally, emotionally, and physically. Don’t let it negatively affect your finances. Just as it was in your 30s, managing your finances in your 40s is a journey. Do not avoid having that critical money-related conversation with your significant other. If you are a parent, this is a stage where money-related conversations with your children may be apt. The journey is best walked with qualified financial advisors who can help you navigate personal finance in your 40s. Have a balanced approach to your investments. You may not be able to take on as many risks as before, but you still have time on your side.