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8 Smart Money Moves to Make Before Turning 40

By: David Bach  |  Last Updated: October 14, 2020
Financial Expert & 10x New York Times Bestseller
IN THIS ARTICLE1. Figure out your Latte Factor
2. Start paying yourself first
3. Refinance your mortgage
4. Maximize your pre-tax retirement options
5. Tackle your personal debt
6. Get a life insurance policy in place today
7. Cut “dead weight” expenses
8. Start earning passive income
You are already rich

Financial freedom is achievable if you’re willing to start right now. It’ll be harder if you’re closer to 40, but as I share in my books like “Start Late, Finish Rich,” it’s absolutely possible to achieve an idyllic financial future if you’re willing to do the work. 

Here’s some good news: The main factor that sets those who are financially free apart from everyone else isn’t the fact that they earn more money. Instead they simply choose to listen to timeless money principles —and they don’t stop until they reach their goals.

Are you ready to commit? Start by making these changes to your financial life before turning the big 4-0. 

1. Figure out your Latte Factor

It’s not about how much you earn …  what matters is how much you spend!

I developed the Latte Factor over 20 years ago to help people take control of their spending. I’ve taught the Latte Factor to millions of people through my books, classes and media and speaking engagements. I even taught it to Oprah! 

What is the Latte Factor?

Your Latte Factor is any amount of money you’re squandering each day, week or month on stuff you don’t truly need or could replace. Your Latte Factor could be many different things: your workplace lunch habits, actual lattes you purchase every morning, subscription services, etc. Cutting back on just one of these things is easy savings! 

Let’s crunch some numbers: Say you saved $5 every day by kicking your daily coffee habit to the curb. But you don’t just save that money — you invest it. In five years, assuming a 10% return, that $5 a day would grow to  $12,255.99. In 10 years, you’d have $31,944.38. And in 40 years, you’d have a whopping $888,504.56!!

Think of all of the things you could do with that money! And it all came from cutting one daily expense that you probably won’t even miss. I created a Latte Factor calculator to help you see just how big of an effect cutting back on a seemingly small expense can make. 

Before you start saving, you need to figure out what your Latte Factor is. I suggest using an app like Personal Capital to track your spending and purchases for a few weeks so you know exactly where your hard-earned money is going. 

2. Start paying yourself first

The point of saving money is to invest it and watch it grow into a fortune. Where should you divert your “newfound” money after cutting your spending? To yourself, of course — and preferably into a pre-tax retirement account, like a 401(k), 403(b) or IRA, where your money will grow effortlessly over time.

Your first hour of work should go to you

Let’s take this a step further: If you work eight hours a day, but have no money left over at the end of the month, then all of your working hours are going to other people. Have you ever thought of it this way? 

All of the time you spend working to make money is lining the pockets of other people. 

Right now, I want you to calculate how much money you make per hour. Now that you have that figure, start saving at least that amount every day. The best way to make sure you’ll actually save it is to make it automatic — meaning, have it go directly from your paycheck or checking account to savings before you even have the chance to spend it. Believe me, you won’t miss this money.

Most banks let you set up automatic transfers to savings, so that part is easy. I recommend opening a savings account with an online bank because they offer significantly better interest rates than the bigger, traditional banks.

3. Refinance your mortgage

Right now is the greatest time in history to refinance your home. Rates are at all-time lows. According to mortgage analytics company Black Knight, there are nearly 13 million people who could save approximately $260 per month right now by refinancing their home.    

If you can lower your rate by 0.5% or more and plan to live in your home for more than three years, I strongly encourage you to refinance.  

You could save over $50,000 by refinancing your 30-year mortgage if your loan balance is over $250,000! Or, you could refinance into a 15-year mortgage and be debt-free sooner.

When refinancing, I suggest shopping around and getting the banks to compete for your business. My top recommendation is Quicken Loans, but check out more of my favorite mortgage refi options.

 

4. Maximize your pre-tax retirement options

Contributing the maximum you can to a pre-tax retirement account is a no-brainer because you don’t pay taxes on amounts contributed up to the legal maximum. These accounts are tax-advantaged miracles, yet only 13% of 401(k) participants contribute the maximum each year, according to a study by Vanguard. Many employers will also “match” your contributions up to a certain percentage — this is free money!

If you have a 401(k) or other pre-tax account with a match from your employer, you need to contribute at least enough to get the full match  (typically 3-6% of your income). To go a step further, contribute even more — with a 401(k), your employer will automatically take the percentage you elect to contribute out of your paycheck, so you don’t even see that money.

In 2020, you can contribute up to $19,500 in a workplace 401(k) plan, according to the IRSIf you don’t have a 401(k), you can open an IRA with a reputable online broker and max out your contribution for the year with automatic transfers to your bank account. Unfortunately, you can only contribute up to $6,000 in an IRA in 2020, and depending on your income level, your contributions may not be tax-deductible. Once you’re 50, you can contribute slightly more in what’s known as a “catch-up contribution.”

5. Tackle your personal debt

Personal debt is a wealth killer. The high interest and fees eat up cash that should be used to invest in your future. There are a lot of different methods to pay down debt. I recommend figuring out which debt you can pay down the fastest so you get it out of the way and can move on to the next. I created the DOLP debt reduction system to help you do just that. 

The “debt snowball” and “debt avalanche” methods are also popular debt repayment strategies  With the debt snowball method, you’ll pay off your smallest debt balance first and then move on to the next smallest, until you’re left with your biggest debt to tackle. With the debt avalanche method, you’ll focus on paying down the debt with the highest interest rate first. Either of these strategies can work well.

Check out my six-step guide to getting out of credit card debt to learn more.

6. Get a life insurance policy in place today

According to Policygenius, 65% of parents don’t have enough life insurance coverage. If you have people dependent on your income, you need to take care of them if you die. Housing payments, childcare costs, college and healthcare are all big expenses that show no signs of getting less expensive. Group coverage through your employer is typically not enough.

I recommend buying a $500,000 to $1 million policy today. If you’re in good health, you’ll be surprised at how cheap this can be. If you don’t have a life insurance policy, start with an inexpensive term policy.

For example, with Bestow.com, a 40-year-old woman in excellent health could purchase a 20-year term policy for $500,000 for less than $40 per month!

The easiest way to get started is by comparing quotes from highly-rated life insurance companies.

7. Cut “dead weight” expenses

Recurring expenses that are higher than they should be are “dead weight” on your cash flow. Insurance is a big one. We all need insurance, but you should shop your car insurance every year, for example, to get a lower rate. You could also:

  • Get new quotes for homeowners insurance
  • Bundle insurance policies with one provider to save even more
  • Cut the cord and cancel your cable TV
  • Stop paying for a gym membership if you never go
  • Give up or minimize expensive hobbies that stand between you and your goals
  • Switch to a cheaper cell phone plan

8. Start earning passive income

If you’ve maxed out your tax-advantaged investment options in step four, let’s go deeper and find even more ways to invest and grow your money. I’m talking about passive income streams.

Here are some of my favorite passive income ideas you can start with:

  • Invest in peer-to-peer lending with LendingClub
  • Invest passively in real estate using a platform like Fundrise
  • Buy stock in your favorite companies through an online brokerage account 
  • Use the equity in your home to buy a new property and rent out the old one
  • Create an online product, book or course you can sell over and over again

You are already rich

Ideally you’ll start saving and investing in your 20s, but if you don’t start until your 30s or 40s, don’t panic. 

Making the decision to start is life-changing. You still have a ton of time to work toward financial freedom as you approach 40. I’m confident that these steps will help you get there. Congratulations on taking action. Enjoy this moment. You’ll look back on it with pride.

Read next: David’s 11 money tips to start living rich today