so several months ago we went over seven money traps to avoid in your 20s and 30s for those who want to catch up on it I'll leave a link to the relevant videos in the description below but the high-level view of it is that in the first phase of your financial life the most important thing is probably compound interest and most of the keys to navigating this portion of your life successfully revolve around making sure that it's working for you and not against you to get compound interest to work for you as much as possible it's crucial to focus on developing your financial intelligence as much as possible ignore harmful external influences that may cause you to make decisions you'll later regret start investing money as early as possible and make sure to continue consistently investing throughout the years as opposed to just saving money to ensure that compound interest is not working against you it's crucial that you avoid excessive debt both by eliminating the debts that you already have using strategies such as the debt snowball tat avalanche or debt tsunami getting a fully funded emergency fund in place and setting plans in motion to avoid collecting any excessive debt in the future doing these things will enable you to start building up a decent nest egg as well as give you the knowledge base to help you better handle any curveballs that might be thrown at you once the numbers start getting a lot bigger as they almost always do in the second phase of your financial life and trust me there will be curveballs because once we reach the second phase of financial life we're no longer the only ones being affected by the outcomes of our decisions sure we may get married and have kids in our 20s but that doesn't mean that we aren't still facing new situations in those areas years after the fact kids are getting older and getting involved into more activities and even preparing for college we and our significant others are further into our careers we're likely having to adjust to things like promotions or career changes and potentially the different schedules and responsibilities that they demand of us all without letting that negatively affect the rest of our life or health or our relationships oh and we're trying to ensure that the hard work that we did in our 20s and 30s isn't going to go to waste by something we do in this phase of our life so yeah even if we do well for ourselves in the first phase of financial life it doesn't mean the job is done with that in mind thanks to a popular request today we're going to be discussing how to succeed financially in the second phase of your financial life which is usually going to be between your 30s 40s and fifties but really it can happen at any time it's really more about the situations and challenges that you're facing than it is your age but that being said let's get started but before we get going be sure to like this video if you haven't already as it really does help out the channel a lot and subscribe with notifications on for more money related videos like this one every single week and if you want to further support this channel you can check out some of the links I've left in the description below which includes a 30-day free trial of audible and two free audio books of your choice as well as a list of some books on money I'd recommend checking out with your free trial so the second phase of your financial life is often characterized by a few things first other people are starting to gain a lot of weight in the choices you make this can be in the form of your husband or wife your kids or your company second your time is potentially becoming more limited than ever especially if you've moved up in the company ladder over the last handful of years and third your income has probably grown quite a bit from where you began your career due to the increased experience hard work and smart investing you did in the first phase of your financial life these things can be great as allowing others to weigh in on your decisions can open you up to new possibilities and experiences that you may never have considered yourself and the promotions can not only lead to more money but also to more challenging and rewarding work on a daily basis the growing nest egg doesn't hurt either but if not handled properly they can also present their own issues the keys to finding success with all these things going on around you is to find the right balance between your growing list of priorities so let's talk about it and increasing income in nest egg is quite common once you enter the second phase of your financial life sure you may not be sitting on a million dollar nest egg by the time you turn 40 unless you did extraordinarily well in your early years but close to or even into six figures is not uncommon and this is an absolutely fantastic situation to be in so long as we aren't going overboard when it comes to lifestyle creep at the same time lifestyle creep for those who don't know is the term used to describe the phenomenon where our standard of living improves as our discretionary income Rises and we begin to see former luxuries as new necessities most of us experience this to some degree over the years and there's nothing inherently wrong with it as long as it isn't keeping us from achieving our goals financial and otherwise in a timely manner ultimately if we aren't careful though lifestyle creep can do that very easily take Jon for exam who at 25 got a job as an entry-level CPA at a small firm making $40,000 a year as a result he needed to keep his expenses in check all told he lives on $36,000 a year and invests the rest this means that he has a savings rate of about 10 percent right in line with the ten to fifteen percent savings rate that is often recommended by financial experts thankfully his company also matches three percent of his salary assuming he puts in at least that much to his 401k so this does give him an additional savings boost we'll assume he makes seven percent per year on his investments after adjusting for inflation over the course of the next 15 years he gained experience and eventually was offered a management level accounting position at a different larger firm for a hundred and twenty thousand dollars a year that is awesome he literally tripled his original salary throw in the hundred and thirty-five thousand six hundred dollars he already has built up in his nest egg from his earlier savings and his financial future looks to be headed in the right direction however John doesn't end up taking full advantage of this good fortune by putting some of that additional income aside for his future he doesn't strike a good balance between today's wants and needs and that of tomorrow's instead his lifestyle creeps right up alongside his income now he's living on one hundred and sixteen thousand dollars a year and investing the rest for a savings rate of about 6% even after his match is taken into consideration assuming his new company matched his 401k investments dollar for dollar up to three percent of his income just like before that would mean that John's nest egg would be valued at around 1 million and seventy seven thousand dollars by the time he turns 65 now on the one hand that doesn't seem too bad he's got a nest egg capable of supporting a $43,000 a your lifestyle in retirement according to the 4% rule but there is one major thing to consider John's going to have to significantly cut back on his current lifestyle in order to get his expenses down to that forty three thousand dollars a year in retirement now to some degree that may not be too bad I mean most people will spend a little less on a day-to-day basis when they leave the workforce simply because they won't have to deal with any of the work-related expenses anymore the general rule of thumb I've seen most often is the 80% rule it's by no means foolproof or a replacement for actually looking at your budget and projecting your expenses in retirement but the rule of thumb assumes that the average person's expenses will fall to about 80% of the levels they were at when they were working so if you're spending around $36,000 during your working years the rule of thumb assumes that your expenses will fall to 28 $29,000 a year after you retire largely because those work-related expenses no longer need to be covered however in John's case this isn't gonna be nearly enough to account for the drop-off he's going to see in his lifestyle now granted he is only 65 so he may be able to work a few more years and save really aggressively to make up for that ground but it's still not the situation he'd probably want to find himself in thankfully we can learn from his mistakes say instead of inflating his lifestyle all the way up to one hundred and sixteen thousand dollars a year after getting that new promotion he instead only inflates it to $60,000 a year that's still a jump from the $36,000 lifestyle he started with but it'll allow him to better set up for his financial future in this case John's nest egg would have grown to around 4.9 million dollars that would allow him to live on around one hundred and ninety six thousand dollars a year in retirement which may actually be a bit excessive given his prior standard of living unless he really wanted to retire early but it's a good exercise to run anyway because it'll help us get an idea of what the right balance is for us and potentially those important people around us the second major focus of the second phase of our financial life is time with these new promotions often come additional responsibilities and hours committed either officially in the sense that you get paid for them or unofficially such as the travel time to business conferences meetings or business trips if not balanced properly it can put a strain on our health physically mentally emotionally and even socially I don't think I need to go into specifics here we all know how things like a poor work-life balance can affect us distress the lack of sleep the often increased frequency of eating lower quality fast foods outside of the home potential depression the medications that come with those things and the strain of personal relationships all have their costs monetarily and otherwise and if we don't find the right balance all the work we did in our early years as well as the work we're doing now to improve our financial life will largely be meaningless because what's the point of having a million dollars in the bank if you're too tired to leave the house or too depressed to interact with others or to stress to enjoy whatever it is you're doing so again focusing on finding that proper balance is key the third major focus of the second phase of our financial life is choice and this one is a little more complicated because it other people when it comes to family there are a few things to consider first is to start preparing early for your kids college expenses as we covered in my video on how to save money for college second is to educate your children when it comes to personal finance I can personally attest to how much of a difference this can make in your kids life as my dad got my financial education started when I was a kid and it did lead to the eventual creation of this channel third is to make sure that you aren't overly spoiling your kids or significant other when it comes to money this also ties into the fourth thing which is to always take care when communicating about money being on the same page when it comes to money is incredibly important as it often is cited as one of the most common reasons for divorce which brings with it a whole host of other problems of its own both for the couple and the kids involved if there are any so continuing to improve your financial intelligence is important but so is balancing that with taking extra time to understand your significant others money views and personality and possibly even that of your children's understanding where their financial head and heart is at will be very helpful when trying to teach them effectively about money if you're looking to get started in either of these areas I would recommend reading mind over money by Brad and Ted quants as it covers the twelve money disorders that we often face the five money personality's by Scott and Bethany Palmer and probably the five love languages by Gary Chapman I'll leave links to all three of the books in the description below as well as links to various videos that I've done such as the one on the twelve money disorders and the five money personalities on this channel emotions can also come into the equation a lot more when other people are involved this can lead to things like panic selling which as we've covered numerous times on this channel is almost never a good thing to do and if you want to see why I'll leave a link to my stock market crashes playlist below but also just having more conservative asset allocations than you really need certainly once you're in your 40s or 50s you may not want to keep a portfolio that's as aggressive as you did when you were in your 20s but that doesn't necessarily mean that you have to have one that seeks to minimize volatility above all else assuming you're still a good way from full retirement there's still something to be gained from having a good amount of stocks mixed in with your investments even if it is a little bit more emotionally difficult to handle those rare occasions where the market is cratering the general rule of thumb I've seen thrown around most often is the rule of 100 which is now sometimes referred to as the rule of 110 but anyway the rule originally states that the percentage of your portfolio you should keep in equities or stocks is equal to 100 - your current age or again nowadays they're saying it's a hundred and ten - your age so if you're 40 years old the original rule of thumb would say that you should have 60% of your investments in stocks and the other 40% in bonds or some other less volatile asset some 401k plans also allow you to use something like target date retirement funds which already slowly start to move more of your money that's invested in it into less volatile assets as the date of your anticipated retirement draws closer either option can work but failing to realize the importance of continuing to invest in things like equities which is generally where most of the growth of your portfolio is going to come from in the long run could make a pretty significant difference in the size of your nest egg over time for instance say that John invested six thousand dollars a year between the ages of 25 and 65 he decides to split his investments evenly between stocks and bonds during that time his stock investment earns 10% per year on average while the bonds manage 5% under this hypothetical his nest egg would be worth around 2 million dollars by the time he's 65 however if he had followed the rule of 100 he would have built a nest egg worth around 2.4 million dollars during that same time frame in the end John would have invested about one hundred and thirty five thousand three hundred dollars of his own money into equities and a hundred and ten thousand seven hundred into bonds during those forty years that's about a 55 45 percent split which is not too different from the original 50/50 split of the previous scenario but it did make a world of difference in the size of his ending nest egg and of course if he had used the revised rule of 110 his nest egg would have been even larger now if he would have gone the even riskier route of pouring all of his money into equities for the full four years his nest egg would have grown to over 3.2 million though he would obviously be setting himself up for a much more volatile retirement in that scenario again the key is finding the right balance between risk and reward so that you can get the most out of your investments without becoming your own worst enemy when times are rough the last thing we're going to cover today is the importance of proper planning and goals as we've discussed in the second phase of your financial life a few things tend to happen your income usually increases and other people come into your financial life this means a few things first since your incomes are often higher tax planning becomes even more important than ever if you haven't found a good tax professional yet you really should start looking for one second since her assets are likely growing at this point and you likely have some dependents estate planning becomes even more important it's not always an easy conversation to have I'll admit but should something happen to you your family will be glad you had the conversation trust me third and related to estate planning since you probably now have other people depending on your ability to provide for them carrying proper insurance is an absolute must term life insurance is usually pretty affordable and will be a godsend to your family if something should happen to you again balancing the needs of yourself and others fourth is to not fall into the trap of making a bunch of expensive home improvements in the hopes of generating large returns on them when you sell the home admittedly this might actually work if you're going to get ready to sell the home right away and you know where the market in people's tastes are in design by that point but if you're not getting ready to sell the home you expected ROI for these improvements is much harder to determine times change as you tastes and if you don't believe me look back at homes from the last few decades there's quite a difference that doesn't mean you should never do improvements I'm just saying they should be done for the right reasons you do improvements for monetary reasons when you're going to sell the home very very soon you do improvements for your own taste and enjoyment at basically all other times fifth and sticking with the real estate theme as most people will have moved into their own homes by this point refinancing your home becomes an option this can be a great way to save on interest over the long term however you do also want to keep in mind that it does often cost money to refinance your home sometimes several thousand dollars so you'll have to weigh the benefits against those costs and you don't want to extend the original term of the loan and keep yourself shackled in debt longer than you have to again remember the keys for success in phase one sixth is to consider paying off your home early this can be great for a few reasons really first the short term ROI on investments is volatile and unpredictable at best one year you might see your investments grow by 30 percent or more the next you may see them fall by 50 percent or more it's just it's very hard to predict ahead of time paying off your mortgage may come with a lower expected rate of return over the long haul than many of the investments that you could make but that doesn't mean it'll end up being the worst decision over the short term that you're actually paying it off second it lowers your burn rate which allows you to both in best more each month going forward which can help you make up for some of the differences in ROI you may have experienced while paying it off and it also draws you closer to one day reaching financial independence and third well there's just nothing quite like that feeling of stepping out into your own backyard and realizing that you own the place you live in free and clear vii start testing out the waters of some of your retirement dreams not only will it be a lot of fun but it will also give you a boost of motivation to really kick your savings into high gear and since you have the larger income now possibly an ever-expanding nest egg and a reasonably low burn rate this extra motivation can be particularly impactful and finally eighth is to measure your progress properly it's always important to measure your progress against your own goals and your own expectations not those are the Joneses or society at large after all you are the one that will have to live with the fruits of your labor not that and especially at this phase of financial life where you're going to be making big decisions regarding more expensive things like cars real estate your kids college funds and retirement planning it's more important than ever before to measure your progress properly so those are some things to keep in mind when navigating this second phase of your financial life like I said earlier the main thing to keep in mind is balance you've worked hard to get yourself to this point and you want to enjoy the fruits of your labor and there's nothing wrong with that you just need to make sure that you're striking a proper balance between today's enjoyment and that of tomorrow's same goes for achieving a proper work-life balance beyond that it's important to continue improving your financial intelligence so that you can make the most out of what you have now and what you're gonna have in the future but now with the added focus on understanding the people around you as well but that'll do it for me today once again if you enjoyed this video be sure to smash that like button if you haven't already subscribe and hit that bell next my name's you'll be notified of all my future uploads I generally upload every single Monday and if you have a friend that would be interested in this kind of content be sure to share it with them let's really get this information out there and start our own financial revolution
