• American Financial Partner

5 Key Steps for Building Wealth in Your 40s

Updated: Sep 4, 2021

Building wealth in your 40s is different from doing so in your 20s and 30s. It involves a new set of decisions: health, insurance and home ownership. However, you should also continue to do the things you were already doing in your 20s and 30s.

Building wealth in your 20s largely involved starting your career. You needed to negotiate the best starting salary you could get. Keeping your debt to a minimum was essential. Being frugal and saving as much money as possible mattered, as well. The most crucial element was starting to learn how to invest for retirement.

Building wealth in your 30s involved many of the same steps, but done more aggressively. For example, you needed to continue to aggressively invest in stocks. Keeping your home and car expenses low was crucial. Making sure not to keep up with the Jones' and avoiding lifestyle creep were also essentials.

Building wealth in your 40s involves many of those same steps. Instead of merely rehashing them, I am going to introduce some new steps to help you continue to increase your net worth. So, here are 5 key steps to building wealth in your 40s.

1. Consider Refinancing Your Mortgage

The first decision you need to make when building wealth in your 40s involves your home. If you have owned property for a while and took out a mortgage, it may be time to refinance.

The average mortgage rate in 2010 was about 4%. The average mortgage rate now is about 2.86%. If you refinance a $300,000 mortgage that you took out at the average rate 11 years ago, it could save you $3,420 per year. Add that over the next 10 years, and that is a whopping $34,200 in savings which could be invested!

Of course, if you don’t own a house yet, you may be considering purchasing real estate to help build wealth. Generally, there are many factors that go into such decisions. Buying most likely will be a better choice than renting for you.

You should know that in the long term, putting equivalent money into stocks is usually a better investment than real estate. On the other hand, if you already have a great deal of savings in stocks, buying real estate in your 40s can be a way of diversifying your overall portfolio.

2. Consider Downsizing to Build Wealth

If you had children in your 20s, this could have a big influence on building wealth in your 40s. They may be heading off to college soon – which could be a big expense.

On the other hand, if your children are leaving the nest, this can be a great time for you to downsize your home. Owning and taking care of a big home is a major expense, not just in terms of your mortgage payment, but also property taxes and upkeep.

Perhaps you would be happy in a smaller house, or even a condo. If so, selling your house and downsizing may make a great deal of sense in your 40s.

There are other ways to downsize too. Perhaps you needed more than one car before, but now can get away with just having one. Maybe your kids have their own cars with them at college now.

Of course, if you don’t downsize, you can still reap savings by taking good care of your home. Make sure to keep it in good repair, and remember that remodeling projects will not necessarily raise the value of your home.

3. Estate Planning

Nobody likes to think about life after they are gone. However, when building wealth in your 40s, estate planning starts to become more important. Some of the most important estate planning decisions you can make are about the durable power of attorney.

When you assign durable power of attorney over an aspect of your life, it gives someone the power to make important decisions for you in the event that you are in a health crisis, or are similarly incapacitated.

Durable power of attorney can be granted to someone for different domains of your life. One of the most important things you can do here is grant the power of attorney over your finances. The person you grant this power needs to be someone you can trust to make the financial decisions that will be in your best interests.

Durable power of attorney is also important for health decisions, which can have a major impact on your finances – as well as on your actual life and death.

Finally, make sure to draw up a living will (a document that states your preferred medical treatment in the event of your inability to express informed consent), as well as a will that instructs what should happen to your estate upon your passing. While preserving wealth isn’t identical to building it, you want to make sure your money goes exactly where you want it after death.

4. Insurance

You already know how important it is to have health insurance, and hopefully you already have this covered through your employment. In addition, you legally must have auto insurance if you own a car, and homeowners or apartment insurance is always recommended as well.

However, when building wealth in your 40s, it is more important than ever to consider other types of insurance as well. Depending on the kind of policy you took out earlier in your career, it’s likely time for a new life insurance policy. If you don’t already have life insurance, now is the time to get some.

Moreover, you definitely want to protect yourself with disability insurance. Hopefully you will never need it, but if something happens that prevents you from working on a temporary or permanent basis, you absolutely want to make sure you are covered.

Finally, I strongly urge you to consider long-term care insurance, which unfortunately isn’t cheap. Nevertheless, it could save you a considerable amount of money in retirement if you need it. Long-term care insurance can help you cover the costs of nursing home care.

As healthcare costs in retirement may total $295,000 or even more, doing everything you can to protect yourself from the high price of healthcare in retirement is essential to building and preserving wealth.

5. Diversify Your Income Stream

Diversifying your portfolio is one of the most important things you can do as an investor. Similarly, diversifying your income streams can be one of the most important ways of building wealth in your 40s.

There are a number of different ways you can do this, and they can involve both active and passive income streams. Let’s look at active income streams first.

Active income streams are those in which you have to continually put in a lot of work to keep the stream going. Your primary day job is the best example of this. However, taking on a side hustle in your spare time, like bartending, driving an Uber, or even starting a small business based on a particular passion or hobby, can be a great way to pick up additional cash.

Passive income streams can be even better and involve far less work in the long run. There are a number of different ways you can generate passive income, including investing in income-generating securities like dividend stocks or bonds.

Diversifying your income streams serves a dual-purpose. First, it helps you earn more money faster. Second, it protects you against a catastrophic loss to your income, like being laid off or fired.

Continuing Action

Building wealth in your 40s involves a number of different steps. It involves taking stock of things like your home, mortgage, insurance and income streams.

While this is a seemingly daunting list of things to do, you don’t have to do it all at once. Chances are you’re already on track with many of these financial steps, however, considering all these factors is essential to building wealth in your 40s.

Read Next: 5 Steps to Building Wealth in Your 50s



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