As you enter your 40s and 50s, you’ll have a lot to celebrate. From career achievements to family milestones, these are the years in which you’ll see the hard work you put in during your 20s and 30s really start to pay off.
These decades are known as your peak earning years, as full-time workers with bachelor’s degrees tend to make the most money in their 40s and 50s.
Here are seven money management tips to make the most of your peak earning years.
Stick With Your Fundamentals
When you’re in your peak earning years, it might be tempting to splurge. However, even as your income rises, never forget the fundamental habits that contributed to your financial well-being. This includes keeping a budget, tracking your spending, maintaining your emergency fund and keeping your debt under control.
While buying a fancier car or upgrading to first-class tickets might sound nice, these costs can add up. Financial professionals refer to this stepped-up spending as lifestyle creep, and they recommend avoiding it as much as possible. As you advance on the earnings arc, you should absolutely enjoy the fruits of your labor—but be judicious. Keeping your lifestyle simple will always help your bottom line.
Curb your spending on wants, focus on your financial needs and shift your additional income toward long-term savings and investing strategies.
Continue Investing
Investments made in your 20s and 30s should continue to grow in value, but that doesn’t mean you should take your foot off the gas. As your income peaks, try to divert whatever additional funds you can into investments. You’ll thank yourself when it’s time to retire.
When you turn 40, it’s time to start taking your investment strategy more seriously. If you didn’t save aggressively in your early career, it’s time to add more to your investment accounts. Max out your yearly retirement contributions, and once you’re 50, max out the catch-up contributions (an additional $6,500 each year).
If you have several accounts, now is the time to consolidate them so you can streamline your financial management. Rolling over your 401(k) into an IRA is an excellent strategy that can make your life easier. You should also shop for the highest interest rates to maximize earnings in your savings accounts.
Review Your Risk and Exposure
In your 20s and 30s, an aggressive stock allocation makes sense. After all, your portfolio has time to rebound from bear markets. But as you enter your late 40s and early 50s, you might want to rethink your risk tolerance.
As they get closer to retirement, many people reallocate into positions with less risk. Decreasing your stock holdings and increasing your bond and cash holdings can shield you from wild fluctuations in the equities market. You should also work with a tax professional to ensure you are limiting your tax burdens.
In many ways, this is a personal choice that depends on your investment philosophy, and your approach might change throughout your 40s and 50s. Remember that our retirement years are longer than they were for previous generations, meaning you might not want to shift to bonds too early. Talk with your family and your investment advisor to discuss your changing investment approach during these key decades.
Bring Your Retirement Into Focus
As you get older, you’ll want to start fleshing out the details of your post-work life, such as where you’ll live and how much you’ll spend. Approach this as a fun and practical exercise and think about what you value most. Do you want to prioritize living near family? Do you want to travel? Are there any hobbies you’d like to focus on?
Whatever retirement dreams you have, you’ll also need to focus on financial realities. Remember the tried-and-true wisdom that you should only draw down 4% of your overall savings each year in retirement. What streams can you access—401(k)s, IRAs, Social Security—and when will you tap them?
One prong of your retirement plan should involve “locking” your savings into CDs. Explore your options and consider step-up CDs that will allow you to respond to changing rates. Use a retirement calculator to get a specific idea of how much you’ll need to save to live your ideal post-work life.
Pay Down Debt
You’ll want to spend your retirement years doing what you enjoy—not worrying about how to finance your lifestyle. With that in mind, use your 40s and 50s to pay down your existing debts.
If you are still carrying lots of debt, such as student loans, your peak earning years are an opportunity to cut them down. Also factor in your mortgage payments. In your peak earning years, you might want to pay more than your usual 12 payments a year.
Finding the right balance between paying down debts and saving for retirement is crucial. If you focus single-mindedly on wiping out your debts, you might not save enough for retirement, so find a healthy financial balance (a financial advisor can help with this).
Plan for Family Costs
If you have children, we don’t need to tell you that they’re expensive. So make sure to reasonably plan for costs as your kids (and grandkids) grow older. Consider everything from college funds to weddings and legacy planning so you can leave your heirs the priceless gift of financial stability.
At the same time, don’t forget to focus on your own health so you can enjoy yourself and be there for your family as you age. This involves not only physical fitness and a healthy diet, but also investing for future health events. As you get older, your healthcare will likely be a major line item, so if you don’t already have one, open a health savings account, which brings added tax benefits.
Splurge a Bit
Once you’ve integrated these money management tips, step back and think about how you want to splurge. If you spend strategically, you can maintain your financial health and have fun doing it.
You might learn a new skill, like cooking or gardening, or you might want to learn a new language. Maybe you want to put your assets to work by turning your vacation home into an income stream. How about taking a road trip and hitting America’s top food destinations? With sound financial management in your 40s and 50s, your imagination is the limit.
William Myers is a financial writer based in Dallas.