Starting at 40? Here's the Investing Playbook I'd Use

Your Next Dollar: Money Management for High Earners

This episode addresses high earners in their 40s who feel they've missed the window for building wealth, emphasizing that it's never too lat

Key takeaways

• The best time to start investing is now—'the second best time' is today.
• Reframing mindset around what you can control is the most critical first step.

Main topics

• Mindset shift for late starters
• Assessing net worth and financial baseline

Notable quotes

"The best time to start investing may have been the last couple of decades, but the second best time is today."

Conclusion

It's never too late to build wealth. By starting with a clear mindset, assessing current

Transcript preview

Speaker 1 (0:00) If you are 40 and just getting serious about your money, this episode is for you. Because if there's a voice in your head telling you right now that it is too late to get started, you wasted your 20s and you wasted your 30s and you never got your money together, we want to show you why that is not true. Because I believe, and I know Ryan believes, that that voice is completely wrong. So today, Ryan Sterling and I are going to dive into the steps to consider so that you can play catch up, so that you can get back in the game and know that you can build wealth for your financial future. Speaker 1 (0:36) But before we do anything else, we want to reframe your mindset. So Ryan, when we talk about someone who is just getting started at 40, why is it so important that they reframe their mindset so they understand that they can actually do this? Because they can. Speaker 2 (0:51) And Speaker 1 (0:51) I feel like a lot Speaker 2 (0:52) of the people I come across who are in their early 40s who are just getting started, there is this mind virus that creeps in that it's too late, it's never going to happen. And that could not be farther from the truth. It's not as easy as if you started when you were 22, but the reality of it is, like, you can't go back in time. You have to start from where you are, be where your feet are today. And if you start the process today, you will make progress over time. It's not going to happen overnight, but Speaker 1 (1:25) it's not going to happen if you don't start. The key for most people to understand is that you need to focus on the things that you can control. Sure. The best time to start investing may have been the last couple of decades, but the second best time is today. And if you can focus on what you actually can control, it'll transform your financial life because the steps we're going to talk about today, just by taking a couple of these steps, can help you improve your finances over the course of the next couple of years. And what we want you to see is that it is never too late. It is never too late to get started. You have decades ahead of you to be able to start building wealth. And you should be doing this for your kids. You should be doing this for your family. You should be doing this for yourself so that you have the ability to have time freedom. And that is what this is all about, is the ability to be able to spend your time doing what you want with who you want. You're going to look back over the course of the next 10, 15, or 20 years, and you're going to be so happy that you started today. And you're going to be so happy that you did not listen to that voice inside of your head that was telling you, oh, it is way too late. You can't do this. You might as well just live it up now because you're going to be working. forever. No, we want you to understand that reframing your mindset and training your brain to move forward, take the next step, focus on those things you can control is the overall most important thing. Now, sure, the first couple of years could be a grind, but outside of that, we're going to work through that step by step. And the key is to figure out where we are starting. The key is to understand what the starting point is. So what are some of the numbers that you calculate, Ryan, when you start to try to find a starting point for someone who may be starting in their 40s? Speaker 2 (3:00) Yeah, I mean, I think we just have to take inventory Speaker 1 (3:01) of where everything Speaker 2 (3:02) is. And it's scary, but I often find it when we actually put together a balance sheet. And what I mean by balance sheet is we just go through and we list out. all of the assets, everything that someone owns. Could be checking account, high-yield savings account, could be their car, could be some sort of collectible that they have. I don't know. It could be anything, anything that you own. You kind of put it out there in the asset category and then take inventory of debts, credit card debt, student loan debt, any sort of mortgage debts. And let's just put it on a sheet of paper and let's just acknowledge. where we're starting from. And I can say there's no kind of magic number that, hey, if you're starting from here, you're going to be okay. If you're starting from here, you're not going to be okay. The reality of it is, it just comes down to not about what you want, but what you want to commit to. So we all want to reach financial independence. But then the question is, when we take inventory of where you're starting from, and we build out that roadmap from where you are to where you want and need to get to over the next 10, 15, 20 years, it then really comes down to what are you willing to commit to? Speaker 1 (4:10) Exactly. And Speaker 2 (4:11) I Speaker 1 (4:11) think if... Anybody listening right now wants to get down to the nitty gritty on it. One of Speaker 2 (4:14) the Speaker 1 (4:14) things that you can do is you can be looking at your net worth. That's a starting point where when you look at your net worth, this is something that I find is very important for me to track because this is the scorecard. So it's your assets minus your liabilities, and you have those in place so that you know where you are starting from. And then from there, we can get into some of the nitty gritty stuff, looking at your total debt. For example, if you have a car loan or if you have credit card debt or if you have any other debt along those lines, we can see exactly where we are. We stand on some of that. And then in addition, we can look at monthly essential expenses. So what is the bare bone essential expenses that you have in place that you need to make sure you're taking care of? Obviously, things like your housing, your food, your transportation, your health care. Those are the types of things that you can't really remove out of your spending. And so making sure that we. figure out what that number is, what that burn rate is, so that going forward, we can then figure out what our savings rate needs to be and what our estimated retirement number is going to be. Because this is a really, really important thing to do is once you have this baseline, then we can start to set up. goals. Now, the next thing I want most people to do is think about their goal. Where do you want to be? And where do you want to land? Because once you can set up this target and once you can set up this goal, you'll be able to have this North Star that you are working towards. You will have this goal in place so that you can then make adjustments over time. towards what this goal is. So many times our advisors at NerdWallet Wealth Partners are going to help you really nail this target number down. But when we are setting this up, let's say, for example, someone's listening right now, Ryan, and they want to do maybe a back of the napkin math on something like this. What would you tell them to do when they are thinking about setting up their target goal? Speaker 2 (5:51) What we first need to do is just kind of understand that, hey, like. In financial independence, what's the lifestyle that you want to live? And kind of once we know kind of what their desired lifestyle looks like, we can then back into what's the asset level that they need to hit. Okay, once we have that number, once we have that North Star, once we have that destination, then we have to back in and we have to reconcile what can be done. today hopefully those things reconcile and i will say that if they don't one of two things needs to change we either need to push back the financial independence date or we need to have a lower uh cost of living uh in in kind of financial independence or retirement there's not a right or wrong i would tell you just from working with clients I would say it's about 50-50 in terms of what people choose. So if you're starting from 40 today and you come to us and say, there's a certain lifestyle that I want to maintain in financial independence and retirement, and let's say we map it out and 60 is that retirement date. Some people say, hey, that's great. Other people say, I really want to reach it at 55. Well, if you want to reach it at 55, one of two things has to happen. You either have to increase your savings rates and we might have some capacity issues there or. you have to lower your desired lifestyle. So again, like we're not here to tell you which one is right or wrong, necessarily. Our job is to be your guide and to say, this is what you want to accomplish. Let's back into what do we need to be putting in motion in order to get Speaker 1 (7:22) there? When you start to think about, okay, well, what lifestyle do I want in my financial future? Maybe you want to spend $200,000 per year in retirement. That's kind of where you are right now. And you want to spend 200,000 once you get to retirement age. Well, if that's the case, the quick back of the napkin math that you can run is basically looking at the 25X rule. So you can multiply this and figure out, okay, well, if I want to spend this $200,000 per year, I multiply that by 25. Well, I need $5 million in my portfolio invested in order to be able to be financially free. This is working backwards from the 4 % rule, which we have talked about a number of times on this podcast. And the 4 % rule is just a quick way to think through, okay, what is the rough number I need to get to in order to get to this point in time? But in reality, the 4 % rule has to have a little more flexibility and there's more things and nuances that you need to look deeper into. But this is going to give you that starting point that's going to help you think through this. Then removing any social security you may expect or any guaranteed income like a pension or something else will help you kind of get closer and closer to this ideal number. But we want to make sure that we have this goal in place. Why? Because this is going to dictate how we make choices and how we make decisions moving forward so that we can ensure that we can hit this number. Now, many of you out there may be saying to yourself, well, I'm 40 years old. I don't know how much money I'm going to be spending at 60. Well, what I like to do is just roughly look at what I'm spending right now. And if you feel as though, oh, I'm Speaker 2 (8:42) going Speaker 1 (8:42) to have my house paid off, or if you feel as though there's going to be other things in place that are going to allow you to lower your overall expenses on a monthly rate, maybe your kids go off to college or they become grown adults. Maybe there's just other expenses that you have in the household. Well, then you can reduce some of those expenses. But this is trying to get to a rough number so that we can start setting up goals and getting to the next steps. That's Speaker 2 (9:02) what I do is I basically look at like. What is my spending today? Like what cruising altitude am I at with that? And like, that is the spending rate that I need to be able to maintain in retirement. And I will tell you that a number of our clients who have reached financial independence and who have retired, they have continued that spending rate throughout retirement. So we have a number of different clients where we kind of put this in motion and we said, okay, what you're spending now. you know, grown with inflation is ultimately what you're going to be spending to have a comfortable retirement. And I will tell you, like, that has proven to be the case. Speaker 1 (9:35) Now we need to figure out what steps are next in order for us to be able to achieve these goals. Now, many of you out there may feel as though, okay, let's get started investing right away. I'm going to get every single dollar in investment so I can move forward. But there are a couple of things that we're going to go through. to help you understand, hey, we need to first protect our finances. We need to build a moat around our finances, and we need to make sure that we are thinking through how we can do this long-term. We want to make sure that we are making these financial steps long-term so that nothing can interrupt compound interest unnecessarily. And so you may feel as though, you know, I need