Midlife Financial Planning: Essential Steps for a Secure Retirement

Building off our last article, The Sandwich Generation: Financial Planning for Dual Responsibilities (alleghenyfinancial.com),  where we discussed balancing the financial considerations and needs of both children and aging parents, those of you approaching middle age have likely started to ask yourselves what you have been working so diligently towards. You may ask, “Am I (or we) making the right financial decisions?” If your answer is convoluted, that is a signal to get back to the basics and redefine your aim regarding money matters. It is a healthy habit to conduct a financial checkup.  Like changes in your health, that “type of thing” will not just “take care of itself” as we sometimes hope the more important responsibilities of life will.

Revisit Your Financial Goals

An actionable step that anyone can take today is to write down their financial goals. If you have previously written down your goals, but it has been some time, find that wrinkled piece of paper in a drawer and see if what you jotted down is still relevant in your life today. As we all know, circumstances have a way of changing.

As you revisit, or consider for the first time, the critical analysis of your current financial management, remember that nobody can dictate your priorities, objectives, and values. Everyone has different goals, aspirations, and attitudes, especially regarding money. It is up to you, or you and your family, to determine these for yourselves.

How you handle your financial well-being can significantly affect your overall well-being, including your physical and mental health, relationships, career, professional growth, and even your faith. The first step towards financial freedom or a greater sense of financial security starts with identifying what financial success and achievement mean to you.

Break Through Emotional Barriers Around Money

Talking about money does not need to be contentious or awkward. Still, it can be a challenging conversation to navigate as there may be firmly rooted emotions based on your unique experiences and financial socialization. That is, how you were raised to view money. Understanding the psychology of money can be very helpful for this. Consider reviewing our blog about Money Scripts to prepare yourself for the conversation.

Perhaps it was never discussed in your family growing up (which is quite common), or maybe it is linked to distressing memories that have caused you to avoid the topic in adulthood (even more common). It has been said, “People seldom make financial decisions; they often make emotional decisions.” You can be well-informed and seek prudent guidance. Still, you will not have confidence in your financial decisions and their alignment with your envisioned future if you have not worked on your relationship with money and the feelings it causes, good or bad.

The Power of Knowing Where Your Money Goes

Once you determine what you are willing to give your time and attention to, your preferred lifestyle habits, and ultimately, the purpose and meaning of your actions, that should help you answer a simple question: “Where is my money going?” As simple as it sounds (because it is), you must first understand your budget (yes, the famed yet boring budget talk). In short, you cannot effectively assess your current financial positioning and, more importantly, your capacity to accomplish your financial goals if you do not know what is at the foundation.

Creating a budget is a way to understand your current financial situation It doesn't have to be complicated or require advanced spreadsheet skills. Your budget shouldn't cause stress or take hours to analyze. Sitting down with a pen and paper at the kitchen table is a simple and effective method. You do not need to account for every penny, but small, frivolous spending can add up quickly if not kept in check. Keep an eye on your level of discretionary or non-essential expenses. Understand where your money is going, and you can begin to take more control over your finances through strategic changes in your everyday spending, savings habits, and adjustments to debt or loan payments. If you are not where you want to be financially, a budget can help redirect the course of your personal economy.

Set Up Automatic Payments and Investments

Just as when driving down the highway, there may be a time and a place for putting your finances on autopilot along your journey. Initially, it may be helpful to set up a plan and let it run in the background (such as with retirement savings through a 401(k) or an IRA). Inevitably, you will encounter situations where you must come to a financial standstill or make turns requiring you to retake control of the wheel from your auto-investing and savings. So, what does that mean as it relates to your finances?

Why "Lifestyle Creep" Can Derail Your Goals

The natural tendency is to spend what we earn and increase that spending even more as we earn more, a phenomenon known as lifestyle creep. We’ve previously explored this phenomenon in depth in our blog “What is Lifestyle Creep and How to Stop It.” It can be a real barrier to building your wealth if you aren’t aware of it.

To live a more spontaneous life free from anxiety and worry, automating certain aspects of our financial life is critical, especially when saving for the short term or investing for the long term. If you do not intentionally earmark savings into your monthly expenditures, it will likely not happen. A way to mentally shift how you think about your savings strategy is to build “savings” into your budget (yes, that thing again) as a monthly obligation like you would treat a mortgage or car payment. Think of it as “My Pay” vs. “Whatever is left over each month.”

Consistently saving creates disciplined money management habits and lets you prioritize who gets paid. And who better to start with than yourself? Committing to something as simple as a personal savings plan and executing that plan regardless of the dollar amount will give you a sense of accomplishment. Are you always going to be motivated to “save, save, save?” No, but good habits developed over time will continue to move you to action even when you are not motivated.

Maintain Control Over Your Finances

Beyond peace of mind, saving money has practical utility as well. Setting aside a portion of your income can serve as an emergency fund. An emergency fund is specifically meant to cover unexpected expenses or to mitigate the impact of a sudden loss of income. These commonly include car or home maintenance, medical expenses, or a temporary loss of employment. Having an emergency fund provides financial flexibility. Rather than relying on a credit card (which may accumulate interest charges if the balance isn’t paid off) or borrowing from the bank, you can manage and pay for unanticipated costs out of your own money, not someone else’s. This demonstrates real control over your finances, which is a great feeling.

The general rule of thumb for an emergency fund is to set aside 3-6 months’ worth of living expenses separately from your everyday spending account used for your regular bills and expenses. Aim for 3 months if there are two income earners in the household and a minimum of 6 months if you are the sole earner.

The Benefits and Risks of Using Credit Cards

Credit card balances reached $1.14 trillion in the second quarter (https://www.newyorkfed.org/microeconomics/hhdc). Some in the field of personal finance vehemently oppose using credit cards in any circumstance because they believe it is tied to a deeper issue. Bluntly stated, they think “people” do not have the self-control to put their finances in order and spend less than what they earn and that the “buy now, pay later” mentality is the beginning of financial ruin. There is some truth in that, but there is always more to the story, particularly in today’s environment, as the increase in the cost of living over the past few years is no mystery, and more households are depending on credit utilization to cover just their essential expenses. That is another article altogether, but it is worth mentioning as you evaluate your credit usage.

Leverage Your Credit Card’s Fraud Protection

There is nothing wrong with the avoidance of “credit” or using it sparingly. However, there are advantages to having a credit card. While you may prefer to minimize the risk of overspending, credit cards can be used as a tool to minimize the risk of loss in today’s digital transaction environment. Utilizing a credit card for everyday purchases can protect your money from fraud or loss due to compromised card information. Additionally, many cards offer rewards. So,  if you are going to spend the money anyway, why not get something back for it?

On the other hand, a debit card can prevent you from spending more than you have. However, there’s a high chance that your card information will be fraudulently used at some point. With a credit card, your transactional exposure is isolated to the card company or issuing financial institution, which feels different than when your checking account may be directly impacted, as may be the case when your debit card is compromised.

Building Your Credit Score Through Responsible Use

If you have outstanding credit card balances or you plan to start using a credit card, it’s important to make it a habit to pay off the entire balance each month by the due date. This is easily accomplished by setting up a “pay in full” auto-deduction, which will directly debit the payment each month from a deposit account you designate. That process is an out-of-sight, out-of-mind mechanism that ensures payments do not slip through the cracks, but be sure to reference back to your budget (again) periodically to ensure the level of spending on credit corresponds with your planned, budgeted expenses, as increases can go unnoticed. If something is off, odds are purchases have crept up.

Understanding the Different Types of Debt

We all know what debt is, but what draws us to it? Total household debt continues to rise in the United States (https://www.newyorkfed.org/microeconomics/hhdc). But why? Is it a lack of personal responsibility? Are we more concerned with the opinions of others? The economy? Culture? Of course, it is a combination of factors, but regardless, it is for each of us to determine what debt means and how we view it as part of our overall financial plan.

Avoiding unnecessary consumer debt is optimal. You will never reach your full financial potential if you always pay other people for their money. Back to the basics. Budget (there it is again). Where is your money going? If most of your paycheck is going to someone else, how can you pay yourself? When you clearly define what you aim to accomplish financially, you will find that endless borrowing from others will only widen the gap between where you currently are and where you want to get to. Bypass the traffic jam and take the faster route to your end destination by putting a plan in place to either limit future debt or reduce existing obligations.

Investing: Assessing Your Risk Tolerance

Once you have gained a thorough understanding of your current financial situation, you will have the right foundational knowledge to engage in investment discussions and be better equipped to stick to a long-term strategy that accounts for changes in circumstances. This ensures that you do not overcommit your resources from the outset.  

If you have been managing your own retirement and investment planning, you may be hesitant to move beyond the basics and openly discuss your complete financial picture with a financial professional. This may make you feel vulnerable, or you may have preconceived notions about professionals in the financial field, leaving you unsure about working with them because you do not want to feel pressured into something that you are uncomfortable or unfamiliar with. Articulating your financial goals will provide the necessary confidence and judgment to overcome any hesitancy.

You have probably heard many of the same phrases within the industry, such as, “The goal of investing is to put your money to work...to earn more money with your money...to make money while you sleep,” or, “You’ve worked hard for your money, it should work hard for you!” That all makes sense, but do those words excite you or move you to action in any particular way?

Why Working with a Financial Professional Matters

Our role here at Allegheny Financial Group is to understand what is important and relevant to you and your family and to align you with the most appropriate solutions and/or partners that best meet your financial needs and objectives by mapping out a defined financial plan. Part of that overall plan is implementing an investment and retirement strategy that will move you from point A to point B. Knowing your “B” will help us collaborate with you and recommend the path forward to help you reach that destination.

Author: David Radziak, CFP® | Allegheny Financial Group | September 2024

Allegheny Financial Group is a Registered Investment Advisor. Securities are offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.