40 is an age when many have to freeze some important plans around their finances. Many of the important life stage goals are imminent at this stage, and one needs to ensure that the long term retirement goal is not compromised. Salary levels would have also gone up and the potential to make larger savings is high.

The next few years are an important part of the journey towards financial freedom.

1. Where are you with respect to your life stage goals:

Evaluate where you stand against your important life stage goals.  

  • By now, you should have committed to the purchase of your ‘home’ and the EMIs would also have been continuing for some time. Now is the time when you need to seriously consider reducing your home loan to a manageable number, so that your remaining home loan is sufficient to take advantage of tax breaks. 
  • Children’s education is important, and with college education costs going up, one needs to set aside a sufficient amount to cover for their education. Do plan, and save, for such expenses.

2. Last leg to save for your retirement:

40 is also when one needs to seriously prepare for retirement goals. By this time, a good bit of your home loan should have been paid off. Your salary should have also gone up at the same time, thereby reducing the proportion that is consumed by EMIs. Children’s college education is some time away, which will consume a large part of your earnings in future years which are still some time away.

The next few years are a good period to save aggressively towards your retirement. This is also the last stretch for you to ensure your lifestyle is not compromised after retirement.

3. Where to invest:

  • Keep some money aside for your emergency needs. This should be enough for about six months of your family expenses.
  • If your current savings rate is high, debt investments can be limited to 30% of your portfolio. Do save in growth schemes of liquid funds, hold for more than three years and benefit from indexation.
  • If your home loan EMI covers for your tax breaks, take that. Otherwise, invest to the extent of tax breaks in ELSS funds.
  • Your remaining savings can go towards equity mutual funds.
  • Long term retirement and children’s education related savings can be invested in a mix of large and diversified equity mutual funds. If the portfolio size is large, some component of international equity exposure can give you better diversification.

4. Fix the hygiene factors:

  • Do list down all your assets, bank account details, demat details and mutual fund details. Share the list with your spouse.
  • Make sure nominee details are registered properly across all your financial assets.
  • Do prepare a Will. This will make asset transfer easier, especially for property. Sometimes a simple Will makes a huge difference.
  • Take a term life insurance policy, which covers your remaining home loan EMI and some additional funds to take care of your family in the event of the unthinkable.
  • Health care insurance is a must, as it is a potential risk which can derail your long term plans. Taking a family policy through your firm can be cheaper.

5. Few quick things to remember, since time is on your side:

The following table provides the approximate number of years it takes to double your money across many investing avenues and to what extent they can beat inflation. The longer the time period, the lower the risk levels.

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Welcome to the wonderful world of investing. Working towards financial freedom may not buy you happiness, but it does give you several options in life.