Building Wealth in Your 30s, 40s and 50s

After you have been working for some time and have set the foundations for improving your finances, you will need to continue building your wealth and also learn how to maintain that wealth. Building wealth in your 30s, 40s and 50s involves increasing your income potential and cash flow. This can often be challenging, as it is this time of your life when you may face increasing costs associated with raising children, including education costs, as well as paying off a mortgage or other debts that can reduce cash flow.

Increase your net worth

Your net worth is how much you own minus how much you owe. It is the total value of your assets minus the total amount of liabilities. Increasing your net worth involves a combination of increasing assets and decreasing liabilities.

Examples of assets include:

• the market value of your house, property investments and land
• retirement funds, such as Roth IRAs, 401k and superannuation funds
• the balance of bank accounts
• the current value of a share portfolio
• trust accounts and other investments
• the value of a business
• the sale value of cars, caravans and boats (not the amount you paid, but the amount you could sell them for)

Examples of liabilities include:

• the balance of your mortgage, property investment, and land loans
• the amount owing on personal loans, car loans, student loans, and interest-free loans
• credit and retail card debts
• periodic payments for hire purchase and leases
• the balance of any business loans

To determine what your net worth should be based on your age and income, the following simple formula covered in “The Millionaire Next Door” by Dr. Thomas J. Stanley and Dr. William D. Danko (Link*) can be used:

Expected Current Net Worth = Age x Gross Income / 10

This formula is a guide only and is not suitable for younger adults below about 30 years old. This is because there may not have been enough time to build wealth from paying off a mortgage, paying for child expenses, etc. In this case, the expected net worth may be overestimated. Nor is it suitable for retirees receiving income from a retirement fund, social security, or a pension. In this case, the expected net worth may be underestimated.

Stanley and Danko define three different wealth creator categories based on actual versus expected net worth. These include:

• Under accumulators of wealth: if your net worth is less than half the expected net worth
• Average accumulators of wealth: if your net worth is close to the expected level
• Prodigious accumulators of wealth: if your net worth is at least twice the expected level

Which category are you in? If you are an average or prodigious accumulator of wealth, congratulations! You are on the path to financial success. If you are an under accumulator of wealth, don’t despair. Look at ways to increase your assets and decrease your liabilities. Check out the financial tips for young adults article for some inspiration.

There are seven factors of wealth described in “The Millionaire Next Door” by Stanley and Danko (Link*). They have found that wealthy people:

1. Live below their means. They spend less than they make.
2. Allocate their time, energy and money more efficiently. They try not to waste these resources.
3. Consider financial independence to be more important than social status. This mindset avoids the “keeping up with the Jones’s” mentality.
4. Did not receive economic support from their parents whenever they needed financial help. Their parents were either unable to give them financial support or let them work things out for themselves to learn from their mistakes or miscalculations. They are able to make financial decisions and build wealth on their own.
5. If they have adult children, the children are financially self-sufficient. It is difficult to get ahead if you constantly hand your children money to avoid financial challenges. Instead, they taught their children how to become financially independent.
6. Know when to take advantage of market opportunities. They are good at identifying opportunities and acting on them.
7. Choose a career that suits them. They work in a career that they are good at, enjoy and make a decent living from.

Avoid increases in credit limits and eliminate debts

As you build more wealth, banks will often reach out to you to inform you that you are able to increase your credit limit. Or tell you that you can afford a more expensive house (more debt equals more interest the bank receives). Just because you can, doesn’t mean you should increase your debt. Make sure you use debt wisely. Minimize or eliminate bad debt (with high interest), and use good debt (low interest) to grow assets.

There are a number of milestones to try and achieve by the time you are in your 40s and 50s. Aim to pay off high-interest debts (e.g. car loans, credit cards) sooner. Then focus on paying off the larger debts such as mortgages in your 50s. You don’t want the hassle of paying off a mortgage after you retire!

What to do with spare cash to burn

If you are paying off a mortgage and have spare cash to burn, what would you do with it? Pay more into the mortgage? Save the money in a bank account? Invest it? The decision will be based on the timeframe, your risk tolerance, the current interest rate on the mortgage, the current interest rate on your savings account, and the current inflation rate. The decision doesn’t have to be only one of these options. You could pay some into the mortgage, save some, and invest the rest.

Let’s look at a simplified example to compare the financial outcome of three people. We will call them Samuel Saver, Peter Paydown, and Indiana Investor. Samuel, Peter and Indiana have just bought their first house at the age of 30. To keep things simple for the purpose of this comparison, the following conditions and assumptions are made:

• they all use the same bank to keep fees the same.
• they all have excess cash available at the end of each month amounting to $2,200.
• their loan amount after paying for the deposit and other fees is $400,000.
• they all pay the minimum monthly payment into their mortgage, and no more.
• their bank account balances and investments are $0 at the beginning of the time period of this example.
• the interest rate on their mortgage is 4.5% per year, applied at the end of each month, and remains constant over the life of the loan.
• the interest rate on the bank’s high-interest online savings account is 2.5% per year. However, adjusting for assumed inflation of 2.0% per year, the realised increase in actual value is 0.5% per annum. Interest is paid at the end of each month and remains constant over the period of this example. Inflation is assumed to remain at 2.0% for the period of this comparison.
• after the mortgage is paid off, they invest their extra $2,200 each month in a diversified share portfolio that yields a long term average annual increase of 8% per year. Adjusted for the assumed inflation of 2%, the actual yield on the portfolio balance is 6% per year.
• payment of their extra cash into savings accounts or investments is made at the end of each month.

Note: The above assumptions do not represent reality. Fees, interest rates, inflation and share prices change regularly. They can fluctuate over short periods of time (days), or they can change gradually over a period of months or years. The assumptions are chosen in this example based on approximate values. As such, you should not expect to achieve the same outcomes as the fictitious characters in this example. The aim of this example is to show how different financial strategies can impact future wealth.

The differences between Samuel, Peter, and Indiana are in the way they manage their excess cash. Samuel Saver has a low tolerance for risk and prefers to keep extra cash in his high-interest online savings account. Peter Paydown prefers to pay debts off as quickly as possible and secures a mortgage with a loan term of 10 years. He transfers any extra cash into a savings account. Indiana Investor likes the idea of investing. She uses the extra cash to invest in the diversified share portfolio that yields a long-term average annual increase of 8% per year (6% adjusted for inflation).

The loan and payment details for each are summarized in the following table. The important thing to note here is that they all spend the same amount each month. The difference is in the amounts they save, pay into the mortgage and invest.

Loan and payment details	Samuel Saver	Peter Paydown	Indiana Investor
Loan term	30 years	10 years	30 years
Minimum monthly payment into mortgage	$2,027	$4,146	$2,027
Monthly payment into investment portfolio	$0	$0	$2,200
Monthly payment into savings account	$2,200	$81	$0
Total monthly payments	$4,227	$4,227	$4,227

Let’s track their finances over the 30-year loan term period plus an extra 5 years (when they have reached the retirement age of 65). The numbers below are adjusted for inflation, which means the amounts are equivalent to money in today’s value. You may be surprised at the end result for each of these homeowners, shown in the following chart.

This chart shows that even though Peter Paydown paid off the mortgage in 10 years and then invested the extra cash until retirement, he has a little under half of what Indiana Investor has in her investment portfolio. Samuel Saver was the worst off by the time he reached 65, with a little over $900,000 in his savings and investment portfolio. The relatively low interest rate of the bank account, combined with the value-reducing effects of inflation on money, resulted in reduced growth of wealth for Samuel. Peter and Indiana fared better because they invested their extra cash in the stock portfolio for a much longer period of time.

The following table shows how much wealth Samuel, Peter, and Indiana had at retirement (age 65). If they withdraw around 4% of their investment portfolio each year to supplement their income during retirement, the differences between the three are substantial.

Information	Samuel Saver	Peter Paydown	Indiana Investor
Time to pay off mortgage	30 years	10 years	30 years
Savings and investments after 10 years	$257,456	$9,479	$360,534
Savings and investments after 30 years	$735,320	$1,026,963	$2,209,933
Savings balance at retirement (age 65)	$753,888	$10,738	$107,490 (#)
Investment portfolio balance at retirement	$153,494	$1,524,587	$3,000,000
Yearly income before tax (*)	$6,140	$60,983	$120,000
Assumed tax on sale of investments	0%	15%	20%
Yearly income after tax	$6,140	$51,840	$96,000

It is clear that Indiana has built her wealth to a considerably higher level compared with Samuel and Peter. She can enjoy her retirement with an after-tax income drawn from her investment portfolio of $96,000 per year ($120,000 minus an assumed 20% tax). However, she can be vulnerable to market fluctuations leading up to and during retirement if her investment portfolio is not geared towards more defensive assets. Refer to the asset allocation and wealth protection sections below for how she can do this.

At the other end of the scale, Samuel can only draw a little over $6,000 per year from his investment portfolio to supplement his retirement income. He has a lot more cash, however, he won’t earn as much due to the relatively low interest rate from his savings account and the effect of inflation on the purchasing power of his money. Lastly, Peter will have an after-tax income of around $51,840 per year from his investment portfolio. However, he has a limited cash buffer of just over $10,000. Paying off the mortgage quickly (10 years instead of 30 years) has left him more vulnerable to unexpected emergencies.

As mentioned earlier, you don’t have to choose only one strategy. It is more common to transfer some extra cash into investments in addition to paying down loans. If you are building an emergency fund, you could be transferring a portion of the extra cash into a high-interest online savings account. There are many different scenarios that can be chosen. Seek advice from a reputable and qualified financial adviser to help you choose which options are suitable for you based on your personal financial situation.

Avoid lifestyle creep

Lifestyle creep is a trap that many people fall into. Lifestyle creep, also called lifestyle inflation, refers to the situation where people spend more on discretionary items as their income increases. They may buy a larger house, a new car or boat, expensive jewellery, or travel to a dream destination instead of increasing their savings and investments. People often feel they deserve to reward themselves when they receive a raise or a bonus. The problem with lifestyle creep is that it is often difficult to notice as it can be gradual and occur over many years.

So how can you avoid lifestyle creep? Use a budget! If you haven’t created a personal budget it can be difficult to track your spending. Once you have a budget, you should make it a habit to reassess your budget each time your income or expenses change. Make sure you keep track of your longer-term goals as well, such as your wealth requirements for retirement. Having financial goals and reviewing them regularly can help prevent unnecessary spending and gradual deviation from those goals.

Allocate your investments to lower-risk assets

When you are in your 30s and 40s, you can remain in more growth assets with some exposure to defensive assets. You have time to ride out any fluctuations in the market. As you reach 50 and beyond, it is worth reallocating your assets to more conservative and defensive types, with less exposure to the more risky growth assets.

Many retirement funds, including superannuation funds in Australia, have investment options that automatically transition from primarily growth assets to mainly defensive assets as you get older and near retirement age. This is to help prevent the loss of wealth due to market downturns. If you are no longer earning income from paid work, the last thing you want is to lose wealth and subsequent income during retirement.

Protect your wealth

As you build more wealth over time, you need to protect it to prevent it from declining. In addition to allocating assets to more defensive classes as described above, there are other measures to help protect your wealth.

If you own a house, car, or other expensive assets, make sure they are insured. Insure the contents of your house as well. Even though insurance costs money and reduces your cash flow, it can save you in times of need. Medical insurance becomes more important as we age as well.

It is better to pay a small amount of your income on insurance than to lose all or most of your wealth in the event of a house fire, natural disaster, or an unexpected health event.

If you have children to pass on a sizeable inheritance, you would want them to be sensible with the wealth that you’ve worked so hard to accumulate. Teach your kids to become financially literate and resilient. “The Barefoot Investor for Families” by Scott Pape (Link*) is easy to follow and has actionable strategies to teach young children and teens how to manage money. If your children are older, Scott Pape’s best-selling book, “The Barefoot Investor 2020 Update” (Link*), provides further wealth-building strategies.

More resources on building and maintaining wealth

The following books provide more detailed information on the topics covered in this article. Feel free to browse through this list and support the site by making a purchase at one of our affiliate partners. Please read our affiliate links disclosure for more information. Note: The links below will open in a new browser tab or window.

Remember to choose your preferred format (paperback, hard cover, digital etc.) before making a purchase!

• The Millionaire Next Door, by Thomas J. Stanley and William D. Danko Link*
• The Barefoot Investor for Families: How to teach your kids the value of a buck, by Scott Pape Link*
• The Barefoot Investor 2020 Update: The Only Money Guide You’ll Ever Need, by Scott Pape Link*
• The Total Money Makeover, by Dave Ramsey Link*

(*) This site contains affiliate links to products. We may receive a commission for purchases made through these links at no extra cost to you. Please read our affiliate links disclosure for more information.