By Lisa Poisso, Contributor
Young people aren't the only ones with money problems -- people in their 40s experience financial setbacks at well. Although you might have a few cars in the driveway, a house you can call your own and a solid retirement savings plan, you're still susceptible to financial mistakes.
From money management issues to common debt traps, watch out for these common money mistakes 40-somethings make.
1. Not Having a Plan for Your Money
The bar has been steadily rising for 40-somethings who are working to maintain their place in the middle-class pack, noted economist William Emmons of the Federal Reserve Bank of St. Louis. On top of that, many Generation Xers took a financial torpedo during the Great Recession right at the time they were stretching to afford housing and establish careers.
"That's the group we feel maybe doesn't get enough attention for having suffered a great deal in this cycle," he said.
If you're a 40-something recovering from losing a house or a job, make a plan for your money now -- and stick to it. "If you're reeling from this blow financially in your 40s, there's not a lot of time to recover," said Emmons.
2. Not Maintaining Enough Liquidity
A lack of access to cash in an emergency sends many Gen-X families to predatory payday lenders, Emmons said.
"It should be a high priority to have enough cash reserves so that you don't have to go to a high-cost lender, or sell off assets, or pass up opportunities when they arise," he said.
If you don't have an emergency fund by this point, you might need to make some aggressive moves to establish one. The short-lived sting will pay off big over the years.
3. Letting Your Emergency Fund Fall Behind Your Growth and Expenses
If you've had an emergency fund in place for years now, don't pat yourself on the back too hard. Many people realize in their 40s that their emergency funds now fall woefully short of supporting their larger incomes and budgets.
Whether your cash reserves have kept pace with your budget or not, when you've reached your 40s, it's time to invest your emergency fund for maximum growth while keeping those funds liquid.
4. Getting Complacent About Carrying Consumer Debt
It's easy to get too comfortable when you're tucked into a good job and cozy home. But don't get complacent about carrying consumer debt.
"Not that everyone that has borrowed has trouble, but people who have trouble typically have borrowed," Emmons said. Limit your exposure to debt, and don't use a current position of strength to justify putting yourself in a precarious position.
5. Prioritizing Paying Off the Mortgage
Some people crave the security of owning their home free and clear, but putting your mortgage ahead of other financial obligations is almost always a bad idea. Before you pay off your home, you might want to pay down all your other debt, catch up on your retirement savings and start saving for your child's college.
6. Assuming Remodeling Will Add Value to Your Home
The luxurious bathroom remodel you feel brings a little slice of heaven to your humble cottage-style home might be exactly the thing a potential buyer will want to rip out and redo. Don't count on others to value remodeling and renovations the same way you do. Over-customization can lower your home's value.
Instead, stick to the home renovations that will pay you back. For example, consider remodeling your kitchen, painting your home's interior or opening up the floor plan.
7. Putting Your Child's College Ahead of Retirement Savings
When your family, friends and neighbors are putting their kids through college, the pressure is on to do the same. But if you're behind on your retirement savings, funding your kids' education is the wrong move.
Your children can take out a loan for their tuition, but you can't take out a loan to live on during retirement. It's like putting on your own oxygen mask first in case of an airplane emergency -- don't help the kids until you've helped yourself.
8. Dipping Into Your Retirement Funds
The power behind retirement savings is time -- time for interest to work its magic and time for the market to lean your direction over time.
When you dip into your retirement funds, even with the best of intentions, you take away the time that makes long-term savings so effective. Plus, cashing out your 401k before you're 59½ means an ugly 10 percent penalty on top of income taxes.
9. Not Diversifying Your Investments and Savings
The reason boomers came out of the recession in better shape than Gen Xers is that they had diversified their savings and investments.
"It's true, the stock market crashed at the same time as the housing market did -- but the stock market came back," Emmons said. "Older people tend to be more diversified, so they have done very well in that regard."
Don't throw all your eggs into one basket, he advised -- whether that's your house or a particular investment.
10. Thinking Being Risk-Averse Is a Bad Thing
"It doesn't get glamorized the way entrepreneurs and risk-takers [do], but being risk-averse is a very good strategy for most people," Emmons said. "And by that I mean keeping your checking account stocked so you have emergency cash, having a very diversified portfolio and keeping your borrowing very low. Control the things you can control -- so reduce risks, and be boring and conservative and prudent."
11. Assuming Your Best Earnings Are Still to Come
It's easy to assume your income will always grow the way it has so far in your career. "Incomes rise in their 20s and 30s and a little bit in their 40s, but peak earnings are usually around 50," Emmons said.
For people with more education, that peak comes a little later but is generally stronger, with more of a peak and more of a falloff. Forty-somethings should expect a flattening income curve and plan accordingly.
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