Growing your Wealth in Your Forties

Most people working in finance related roles will probably be aware of the lifecycle that people pass through as they get older. In your twenties and early thirties you may not have much surplus income, you may have a savings need, and you will probably be working towards purchasing a house. In your late thirties and early forties you might have increased income and expenses as your family grows, you may save more and you are likely to start providing for your retirement. In your fifties and early sixties hopefully you will have your borrowings paid off and you may be increasingly focussed on investment. From your mid sixties on your earned income may cease and you may start drawing your pension, family related expenses may reduce.
Your late thirties/early forties is the period when most people will begin to have surplus income which they can use to accumulate wealth. Some people choose instead to accelerate debt repayment — this can be a mistake.
Most people these days take out their first mortgage in their early to mid-thirties and pay it off over 20 to 30 years, ending in their late fifties or early sixties. If you find yourself with surplus income in your forties it may be tempting to overpay your mortgage, and many articles have been written about how much you can save in interest by doing this. The reason you can save so much in interest by overpaying your mortgage is because of the compounding effect, but this also works in your favour when saving or investing — see more on the very impressive power of compound interest here. If you overpay your mortgage for the full 10 years from age 40 to age 50 you will likely reduce it substantially however by doing this you lose two major weapons in your arsenal when it comes to accumulating wealth. Firstly, and most obviously you lose time, the lack of which is a massive disadvantage when it comes to building wealth. As a result of this you lose an absolutely huge part of the benefit of the compounding effect of saving. Secondly you lose the ability to get a decent return on your investments because as you get older and your time horizon to retirement decreases, investing in asset classes which pay good returns becomes more risky than doing so in your younger years when you have plenty of time to recover losses.
If you don’t build your wealth in your late-thirties and forties when the conditions are right, you are going to find it next to impossible to do so later in life. If you find that you have a very good surplus income available for investment in your mid fifties, say even €20,000 or €30,000 per year, you are still going to struggle to grow it substantially because you are unlikely to be comfortable taking enough risk to get a decent return and your time horizon is short.
Most people have a mortgage and if you don’t have one you probably pay rent. If you are comfortable with the amount of your mortgage repayment and as long as it will be paid off by your planned retirement date, look on it like rent and use your surplus income to build wealth while you still can.
The above comments are general in nature and should not be taken as financial advice as no assessment has been undertaken in relation to your financial situation or objectives.
© Eoghan Gavigan 18 November 2015
