Making Cents: Three financial mistakes people make in their 40s

IN my experience I’ve noticed that when people are in their early to mid-30’s they begin to become more serious when it comes to their finances. And I’m painting a broad brush stroke when I say that because I’m sure there are many people who are much younger or indeed older when that happens to them, so my statement is just my personal observation from what I’ve encountered when I meet people in this age bracket.
And perhaps reaching the age of 30 or just beyond is what one 31 year old said to me recently as being her trigger to and I quote, to grow up and become an adult. And for the first time they begin talking about what their financial goals are and how they are going to achieve them etc.
All good, but then when those same people enter their 40’s, and again I’m just telling you what I see with my dealings with people of this age, something goes awry and the well-intentioned plans they had a decade previously, have either got side tracked or forgotten about. And I guess the reason this might happen is that life just gets in the way and they soon forget about what it was they promised themselves they’d do.
So, the purpose of this article is to remind people, who are either still a distance away from being 40 or those who are close to or in their 40’s, what they need to avoid and how they can get back on track.

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And there are three areas in particular that 40 something’s fall victim to, and most age groups fall victim to the areas I’m going to refer to, it’s just that I see them happen more often to people in their 40’s that’s all. So, now I’m now going to tell you what they are and more importantly what you can do about them.
1. Repaying your mortgage the way your bank wants you to
Just because it says 25 or 30 or even 35 years on the mortgage letter of loan offer doesn’t mean you have to keep it for that long. The bank would like it if you did though. They love long mortgage terms because the longer the term the more interest they get from you.
And I meet so many people in their 40’s who take no notice of what their mortgage rate is and don’t realise they could be paying less if they moved lenders or if they reduced their loan to value or if they improved the energy rating on their home.
All of these things can improve the interest rate they are being charged.
And one other way you can reduce the effective interest rate you end up paying over the term of a mortgage is by making monthly or annual overpayments on your mortgage.
If you have a variable rate mortgage, sorry let me re-phrase, especially if you have a variable rate mortgage, you should give some thought to making monthly or annual overpayments against it because the savings are enormous.
I was talking with a client of mine recently who has a fixed rate mortgage and his lender allows him to make annual overpayments, but they are capped at €6,000. Which was fine by the way because if he did make annual overpayments of €6,000 per year, he would reduce the term of his mortgage by seven years and one month.
He would go from a 22-year term remaining (he started off with a 24-year mortgage) to 15.
And he would save €38,953 in interest savings in the process.
And if he did implement this overpayment, he would also reduce the effective interest rate his lender was charging him and rather than paying them on average 3.75% over the course of his mortgage, the annual overpayment means his effective rate becomes 2.32%.
And of course the other benefit is when his mortgage is finished he could earn €25,500 less because that's what it’s costing him every year (remember mortgage repayments come from after tax income) or he could spend €25,500 more or he could save €25,500 more so there are lots of advantages to making this overpayment and another one has just come to mind and that is, it fast forwards retirement because being debt and mortgage free allows people or at least it gives them the option to dial back the pace they work at.
The average age for a first time buyer is 35.3 years and if someone that age took out a 30 year mortgage I hope they don’t think that it has to last until they are 65 because as I said that doesn’t have to be the case.
And if you are in your early 40’s now is the time to start thinking about accelerating the repayment of it and putting in place a plan where it will be paid off in your late 50’s rather than when you’re 65.
So, I’d say find out what needs to be done and find out what amount you can afford to overpay that fits into your monthly income and outgoings and find out what the impact would be for you and then decide if it's big enough or not.

2. Not saving enough for retirement
I asked one 41 year old recently how much was he contributing to his pension fund and he told me it was the maximum amount, and I thought that’s great, well done.
Yeah thanks he said, and went on to say, he thought 10% was a good number all right.
We had to back up our conversation because it’s a common answer I get from people all the time where people think they are contributing the maximum possible to their pension when in fact they’re not.
The problem is that they get confused with the term maximum because maximum for them is the amount they have to contribute in order to get a matching or increased contribution from their employer. Which means it’s not nearly the amount they can personally contribute, and they end up missing out on tax reliefs, as well as building up a bigger fund faster.
If you’re between the age of 40 and 49, you can make personal pension contributions of 25% of your salary up to an income limit of €115,000.
So, if you are earning €70,000 you can personally contribute €18,750 i.e. €70,000 x 25%.
And here’s the thing, after tax relief that €18,750 is only costing you €11,250.
So, the person I was talking to who was making those 10% contributions could in fact increase them by a further 15%. Which might be a big ask for him because I get that there’s only so much money that can go around each month, and going from 10% to 25% might not be possible but an extra 2% or even an extra 5% might be doable.
And you might think would 2% make any difference at all?
Well if he increased his contributions by 2% on a salary of €70,000, that would mean there is €1,400 more each year going into his pension fund, and after tax relief his salary is reduced by €70 each month.
But that €1,400 compounding over the next 24 years (remember he’s 41) would increase the value of his fund by about €56,264. And here’s the thing, it will only cost him €20,160.
The 2% increase would cost him €2.30 per day. And just to put that into perspective a 500ml soft drink costs I think about €2.10.
And I make reference to this cost in order to rule out the excuse of affordability which is something I come across quite often from people. When you break down the cost, it would be hard to say you couldn’t find €2.23 a day, especially if you’re earning €70,000.
And I think it’s easier to find this money when you know what the future outcome will be.
And when I tell people what 2% could do, they become more motivated and ask what 4% could be or what 6% could. And they ask because when you give them an exciting or big enough reason that’s meaningful for them and they can see how much more they can save where the cost is much less to them, then thankfully you have their interest.
So, what’s my long winded point 40 something year olds?
My point is that you can probably save more into your pension than you currently are and don’t make the mistake of not putting as much as you can into your pension, because if you’re not it’s your 65 year old self you’ll be letting down.

3. Not having enough life cover in place
If you are married and whether you have children or not, you need to make sure you have adequate life cover in place.
In 2023, the average age at marriage for an opposite-sex wedding in Ireland was 37.7 years for men and 35.8 years for women. For male same-sex marriages, the average age at marriage was 40.8, while for female same-sex marriages it was 38.
And getting married is one of the biggest things you will ever do in your life which is why you may need to start looking at increasing your existing level of life cover.
Why?
Because now you have someone who is financially dependent on you and the whole point of life assurance is to compensate them in the event of you dying.
What if you passed away and your income stops, what then? How would your partner be able to financially cope?
Does your employer offer a death in service benefit and if they do, is it enough? Do you even know how much your partner will get? And what happens to you if they passed away? What cover if any do they have in place?
And life assurance is there to help protect that income stream that would be lost in the event of your passing.
And when you have children, this is another event where you need to re-consider your existing levels of life cover. Not only do you have a spouse to consider but now you have children as well.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie