How to start saving in your 40s

Piggy bank with glasses and chalkboard

Also see How to start saving in your 30s and How to start saving in your 50s.

This is no time to throw up your hands, even if you're in your 40s and don't have much savings.

You still have plenty of time to put aside a significant amount of money for your future.

You'll just have to go about it a little differently than if you'd started earlier in life.

You may have to set aside a bigger portion of your income, but hey, you're just entering what should be your prime earning years.

And if you've been living paycheck to paycheck, you may need to break a few bad spending habits. But that's not as hard as you may think.

Financial security, a less stressful life and comfortable retirement are not out of reach.

Just look at how typical families with typical jobs can save hundreds of thousands of dollars, even if they turn 40 with nothing in the bank.

We started with data from the Bureau of Labor Statistics, assuming each worker would make the median income for their profession — 50% of their peers make more, 50% make less — during their 40s.

And during their 50s and 60s, we assumed they'd be in the top 25% of their profession, with only a quarter of their peers making more and 75% making less.

We also assumed that savings would be put in a tax-deferred retirement account such as a 401(k) plan or Individual Retirement Account and invested in mutual funds that returned a solid, but certainly not spectacular, average of 6% a year.

You can do it, too. Just take a look at our 6 smart moves to start saving in your 40s.

Smart move 1. Free up some money.

Establish a goal to save 15% to 20% of your salary.

Start by setting aside a more modest 5% of your income with a clear plan to ramp up your savings by 1% a quarter (every three months) until you reach your ultimate goal.

However much you save is going to pay off many times over later. Simply put, every dollar you put away now could have grown into five dollars when you need it 20 or 30 years from now.

We know that setting aside 15% or more of your income is a tall order with today's high cost of living.

But what you've done in the past doesn't matter. The important thing is what you do going forward.

You're entering the most lucrative time of your life, and it will never be easier to spend less than you make and invest that extra money in yourself.

Start by freezing your expenses and pledging to save all future raises.

Then sit down with your bank statement and an online budgeting program.

Chart showing how much Americans in their 40s have saved on average."You really need to look at your cash flow and see where things are going," says Mari Adam, president of Adam Financial Associates in Boca Raton, Florida. "Track your spending and do some serious thinking about where you can cut back to generate some more money for savings."

The easiest way is to stop spending your hard-earned money on stuff you don't really want or need.

Reconsider subscriptions, memberships, cable services, phone services and ongoing expenses. Check your credit cards for recurring charges.

Spending less is often about breaking bad habits. This may be the last shot you have to impose some meaningful discipline on your finances.

Smart move 2. Pay off your credit cards first.

Carrying a big balance on your credit cards is a giant wealth killer.

If you're paying 15% interest — or more — on thousands of dollars of debt, you need to take the money you're setting aside to pay off those obligations before you start saving.

Why? Because the interest you're paying on those high-cost loans — and that's what they are, loans — is almost always going to be more than the return you can earn on your savings.

"With credit card debt, your money is leaving you to pay interest," says Ben Barzideh, a wealth adviser at Piershale Financial Group in Crystal Lake, Illinois. "The sooner you pay if off, the sooner you can make money that is paying you back."

Our credit card payoff calculator will help you come up with a plan.

Smart move 3. Start saving in your 401(k) plan.

Now that you're ready to save, the best place to put that money is your 401(k) plan.

Most of us are offered what's called a traditional 401(k) plan, which means the money you contribute to your retirement account is tax-deductible.

As a result, your take-home pay will only fall 65 cents to 90 cents for every dollar you put in your retirement account.

Laws governing 401(k) accounts also encourage employers to match the first 1% of your savings dollar for dollar and then contribute 50 cents for each additional dollar you save up to 6% of your annual earnings.

That's an extra 3.5% you could be earning every year and that you don't want to leave on the table.

Our 401(k) calculator shows how your nest egg will grow based on your contributions.

Smart move 4. Choose the right investment.

Most 401(k) plans require savers to put their money in mutual funds, a type of investment that pools the savings of tens of thousands of people to buy a broad range of stocks, bonds or both.

We can understand why you might be a little nervous about that, especially if you've never owned stocks or mutual funds before.

You might be more inclined to put your money into something safer, such as a CD, Treasury bonds or a money market account.

But you have no chance of building the nest egg you'll need for a comfortable retirement by settling for the 1% or less those investments are currently paying.

You need the historically higher returns provided by the stock market to have any shot at success.

Most 401(k) plans make it easy for first-time investors by offering what's called life cycle or target date funds.

Just put your savings — up to $17,500 a year under current rules — into the one designed for the approximate year you plan to retire.

The professional managers running these funds take greater risks with your money when you're young, buying a mix of stocks and bonds with the most potential to increase in price and boost the value of your 401(k) account.

Of course, those kinds of investments are the most likely to tumble if the market falls. But there's plenty of time for the market and your retirement savings to rebound.

As you get older, life cycle funds adjust their mix of stocks and bonds to take fewer risks and ensure your money is there when you retire.

Your account may not grow as fast, but it won't be as susceptible to downturns in the stock market, either.

penny on a fever line5 things you should know about target date funds: Target or life cycle funds can eliminate the guesswork in choosing your 401(k) plan investments as your risk is adjusted automatically over time. They have become an increasingly popular way to save for retirement. But their popularity doesn't mean they are without risk.

Smart move 5. Save for yourself before you save for your kids.

If you have little or nothing set aside for your retirement, you shouldn't be putting money in 529 or other college savings programs.

Your kids can get scholarships and loans for their education. You can't do that for your retirement.

Building financial security for yourself is the smartest, most thoughtful thing you can do for your children. The more you save, the less likely you'll become a financial and emotional burden on your family.

"You have to have priorities, and college is down the list," Adam says. "We see all the time people don't have savings for their own retirement and get in big trouble."

Smart move 6. Track your net worth.

Building financial security is a lifelong process.

Tracking your net worth is how you measure your progress. Celebrating each milestone along the way is critical to keeping yourself motivated and moving ahead.

Your net worth is the value of everything you own minus the balance on everything you owe. In accounting terms, it's your assets minus liabilities.

Our net worth calculator will make sure you don't leave anything out and provide a consistent and accurate measure of your progress.

Don't be surprised if you start out with a negative net worth, especially if you have lots of student loans or credit card debt.

As you pay down debts, save money or do both, your net worth should rise.

Soon you'll have $10,000 that you can call your own. Then $20,000. Then $50,000. And finally $100,000 and more.

You can do it. You'll revel in the benefits of doing it. Enjoy the journey.

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