7 Financial Milestones High-Income Earners Should Hit by 40
If you’re approaching your 40s or already there and you’re a high-income earner, it’s time to get serious about where you stand financially. You’ve worked hard to build your career, and now you need to ensure your financial foundation is just as strong. Whether you’re a doctor, lawyer, dentist, engineer, or any other high-earning professional, there are key milestones you should aim to hit. These milestones will help ensure a secure, less stressful financial future. Even if you’re behind, there’s still time to catch up, but the goal is to have these nailed down by 40.
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Understanding Financial Milestones by 40
Before diving into specifics, let’s set the stage. High-income earners typically have a household income in the range of $200,000 and above. This could be dual-income professionals or someone in a lucrative field. Physicians, dentists, vets, engineers, business owners, and lawyers often fall into this category.
If you’re in this group, you likely have a unique set of challenges and opportunities compared to those earning less. Whether you earn $200k or $800k a year, hitting these key targets will give you peace of mind and the freedom to take bigger financial leaps down the road.
Remember, it’s not about comparing your journey to others. Finance is personal; what works for one person doesn’t necessarily work for the next. So, take this as a roadmap to help you gauge where you are and offer a target for where you should aim.
Emergency Fund
The importance of an emergency fund can’t be overstated. If you haven’t established one by now, at age 40, it’s time to get serious. We’re not talking about a small cushion that might get you through one month of unexpected expenses. This needs to be substantial – a fully-funded emergency fund that’s able to cover 6 to 12 months of living expenses.
Forget leaving this in a low-interest checking account. Put that cash in a high-yield savings account such as Marcus or Ally Bank, where it’ll earn at least some interest. You’ve worked hard for this money; you shouldn’t leave it sitting there doing nothing.
Two-Tier Emergency Fund Approach
Some prefer to split their emergency fund into two buckets:
- Immediate Access (Bucket 1): This is kept in a high-yield savings account for easy access when something unexpected happens—your car breaks down or you face some unexpected medical bills.
- Taxable Investments (Bucket 2): The second bucket might be in a taxable brokerage account. This earns better returns than a regular savings account, but it’s also available if things go sideways.
Each situation can be different. A household with two incomes may not need as much in savings as a single-earner family. Entrepreneurs and 1099 professionals may need more flexible, accessible cash since income can fluctuate.
Your emergency fund is the cornerstone of all financial planning. If you don’t have one firmly in place by 40, that needs to be your first stop on the road to financial freedom.
Managing High-Interest Debt
Next up is high-interest debt. By 40, high-interest debt should either be non-existent or very close to being wiped out. We’re talking about credit cards, personal loans, and maybe even car loans—basically, anything that’s draining your cash flow with excessive interest.
Types of High-Interest Debt
- Credit Card Debt: This is public enemy number one. Interest on credit cards can easily eat away at your income, making it harder to save in other areas. If you have a balance, make paying it off a top priority.
- Personal Loans: Sometimes necessary, but if you have high-interest personal loans, work on reducing or eliminating them.
- Car Loans: If you have a luxury car loan and it’s weighing on your budget, it’s worth reconsidering whether it’s a necessary expense. Is the car fitting into your lifestyle without sacrificing more important financial goals?
How to Tackle High-Interest Debt
Your first move should be paying off credit cards in full every month. Some people like paying more frequently, even twice per month, to ensure their balance stays low when credit bureaus assess their score. Next, avoid personal loans unless truly necessary. At 40, there’s little room for debt that isn’t directly helping you build wealth.
What About Student Loans?
Student loans are a gray area. Many of you may still be carrying that burden well into your 40s, especially if you’re a physician or lawyer. If you’re on track for Public Service Loan Forgiveness, stay the course. Make sure you’re always in compliance to maximize forgiveness. If your loans are private, refinancing to a lower rate (if possible) should already be in your game plan. The important takeaway here: student loans shouldn’t cripple the rest of your financial picture.
High-interest consumer debt? It’s gotta go.
Retirement Savings
By 40, your retirement savings should be in full throttle. It’s not enough to stash away a few hundred dollars a month anymore—this is the time to max out contributions on all fronts.
Where You Should Be Saving
- 401(k) Contributions: Ideally, you’ve been maxing out your 401k for years. If not, now is the time to get that sorted out. Thanks to employer matches and tax advantages, this should be a core part of your retirement strategy.
- Backdoor Roth IRA: For high-income earners, this sneaky tax move allows you to take advantage of Roth benefits even if you earn too much to contribute directly. Are you maxing this out every year? If not, it’s time to start.
- Brokerage Accounts: Beyond your retirement accounts, you should also be stashing cash in brokerage accounts. These accounts don’t have the tax-advantaged status 401(k)s or Roth IRAs have, but they give you greater flexibility with how you invest and when you take the money out.
Get Compounding on Your Side
Time is a major force in building wealth. The longer your money sits in the market, the greater the opportunity for compound interest to work its magic. If you haven’t done so already, revisit all your accounts to ensure you’re maximizing every opportunity. And as you get raises and bonuses, commit to increasing your retirement contributions. Don’t fall into the trap of lifestyle inflation—use those extra earnings to bulk up your financial safety net.
Major Life Expenses
Life comes with big expenses, and it pays to be prepared—literally. By 40, you should be planning ahead for some of the larger costs life throws in your way.
Are You a Home Owner Yet?
If not, don’t stress. Contrary to popular belief, owning a home is not a requirement for financial success. Renting can be just as effective, especially if you live in a high-cost area. But, if you’re keen on home ownership, you should either own by now or have a clear plan to buy in the near future.
Kids’ Education Planning
Private schools, college tuition, extracurricular activities, all these add up rapidly. The earlier you start saving, the better. Thankfully, vehicles like 529 plans offer tax advantages specifically for education expenses. You don’t need to fully fund these today, but you should definitely be contributing regularly.
Factor in Fun
Don’t forget to plan for travel or any “bucket list” life experiences. It’s one thing to save for the future, but you also want to enjoy your life. Budgeting for memorable vacations not only keeps you in balance but helps avoid burnout, especially if you’re in a high-stress profession like medicine.
Insurance Planning
Insurance isn’t glamorous, but at 40, it’s essential. If your disability insurance and life insurance aren’t squared away, that needs to change fast.
Priority Insurance Types
- Disability Insurance: No one likes to think about it, but your ability to earn is one of your greatest assets. Protect it. A solid disability insurance policy ensures you can still provide for yourself and your family if something unexpected happens.
- Life Insurance: Life insurance is less for you and more for those who rely on your income. Group policies offered by employers are great but often lack the right amount of coverage. Your best bet? Look into term life insurance. This low-cost option will give you peace of mind in knowing your loved ones are taken care of should the unthinkable happen. Steer clear of complicated permanent life insurance; term insurance is usually all you need.
Don’t gamble on this one. Proper insurance is key to protecting the financial house you’ve worked so hard to build.
Professional Development and Education
In an evolving professional landscape, continuing education is key—not just for your career but for your financial growth. You want to stay at the top of your game, whether that’s by learning new techniques, exploring new technologies, or expanding your skill set.
Career Growth Amidst Professional Development
The best part? Professional development often translates into better income opportunities. It could be buying into a medical practice, joining a law firm as a partner, starting a side business, or investing in real estate. Explore opportunities for additional revenue streams outside your primary income, and don’t shy away from investments in yourself.
And this isn’t just about your career. Ongoing personal development—through meditation, exercise, or even taking time to reflect—ensures that you’re sharp and focused, both personally and professionally.
Planning for Financial Independence
What’s the end goal? Whether you call it retirement or financial independence, the idea is the same. At some point, you want the freedom to decide whether or not you want to keep working without the financial pressure.
Financial Independence Is More Than Retirement
Financial independence doesn’t mean you suddenly stop working, though. It’s about not having to work. It’s the point where your investments, savings, and passive income allow you to cover your living expenses.
Start Mapping Out Your Timeline
At age 40, it’s time to start really planning that out. Do you want to grind well into your 60s, or do you want the option to slow down in your 50s? How will you handle educational expenses or larger goals like vacation homes? Don’t get caught up in perfection, but do start figuring out your trajectory. This is where collaborating with professionals could make a huge difference.
Summary of Financial Milestones
Here’s a quick recap of what you should aim to check off by 40:
- Establish a fully-funded emergency fund (at least 6 months of expenses).
- Pay off high-interest debt like credit cards and personal loans.
- Max out your retirement contributions through 401(k)s, Roth IRAs, and brokerage accounts.
- Plan for major life expenses, including homeownership, kids’ education, and travel.
- Secure disability and life insurance to protect yourself and your family.
- Invest in ongoing professional and personal development, opening doors to new opportunities.
- Work towards financial independence so you can live life on your terms long before traditional “retirement” age.
You’re not just 40—you’re stepping up to the strongest financial chapter of your life. Stay focused, be disciplined, and above all, take control of your finances.
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