As you go through different financial stages of life, your finances and goals are in a constant state of change. For instance, your goals when you start working may change as you start a family or what’s right for you at the peak of your career may no longer be the same during your retirement. Therefore, you need a sound financial plan that can help you balance what you need to do today to be ready for your tomorrow.
In this article, we will discuss four critical financial stages in your life and how financial planning can fit into each to make it a smooth ride for you.
The Income Stage (Single and Earning: Age 20-30)
When you kick-start your career, your paycheck may not be fat, but you also do not have many responsibilities. Though the urge to spend is high in this stage, try to save as much as possible for the future. Most importantly, develop a suitable budget, build the discipline to live within your income and learn to protect your money. Start by building an emergency fund for contingencies by keeping two to three month’s salary in savings accounts or liquid funds.
The next step is to insure yourself, especially if you have a debt to pay off or have dependents. Buy a term insurance plan with sum assured of at least eight to ten times your annual salary. Also get yourself individual health insurance even if you get a cover from your employer. This is essential because medical expenses grow as you grow older. Also, your employer’s health cover may not be sufficient and will not be available when you quit the job.
At this stage, you should also lay the foundation of your investment portfolio. And since you have time for your portfolio to digest the market fluctuations and grow, you can choose to be aggressive. However, you don’t need to directly invest in stocks unless you understand the markets well. You can begin by investing in Unit Linked Insurance Plans (ULIPs) which offer options to invest in different types of funds (equity funds, debt funds, balanced funds, liquid funds) based on your risk appetite.
You can invest 20 percent of your savings in debt funds and the rest in equity funds, and when you understand the market better,you can consider switching your funds. These days, ULIP calculators are available online to help you compute the amount you require to invest in ULIPs as per your goals. Moreover, ULIP calculators simplify the complicated calculations andhelp you make the right investment decision based onyour age, budget and future financial needs.
The DependentsStage (Married and with Kids: Age 30-45)
At this stage, your expenses are likely to increase as you start building your family. Therefore, you should be better at saving and budgeting by now. To be able to find savings for the short, medium and long-term goals, living by the budget is critical. Therefore, fine-tune and revise your budget periodically to reflect your need for savings. Invest your savings in mutual funds, ULIPs or other investment plans that are aligned to growth and liquidity needs of your goals.Start to save funds for your children’s higher education expenses.
Furthermore, make insurance a critical element for your security. Expand your term and health plans to cover your family too.Similarly, debt management should be a crucial function at this stage. While adding new debt, keep your ability to repay in mind. Meaning, you should not take up new debt at the cost of your insurance protection, retirement savings and bigger goals like buying your dream home. Lastly, start with basic estate planning by making clear nominations on your insurance and investments.
The Growth Stage (Planning to Retire: Age 46-60)
This stage is the golden stage for your finances if you have managed your finances prudently till now. By this time your income would be high, and your expenses would have stabilized, which would result in increased savings.
Managing your investments is critical at this stage as your goals would be closer to being funded. You must re-balance your investments to reflect this and ensure that you are contributing the maximum to important goals like retirement. Your attention should begin to shift from wealth accumulation to wealth preservation. In simple terms, decrease the percentage of assets invested in equity and invest a larger percentage of assets into fixed-income investments.This would be fairly simple if you are invested in ULIPs as insurers like Future Generali allow fund switching to be carried out based on how you want to balance your equity-debt portfolio.
Further, coverage for your health and life insurance should be updated and aligned with your situation. Also, formalize a ‘Will’ based on how you would like to distribute your estate.
The Retirement Stage (Age 60 Plus)
Once again budgeting should become the focus of your finances during this stage. For that purpose, strive to control your expenses to stay within the available income and manage your investments to generate a regular flow of income.Adequate health and life insurance would become critical since unexpected incidences can throw your income off rails.
Finally, be sure to plan out how you will spend your time in retirement. Going from a full-time job to a complete lack of structure can throw you for a loop. So, figure out how you would like to spend your post-retirement life and what that will cost you. For instance, as your primary career winds down, you can decide to start your own business. Doing so will not only occupy your days but also serve as a means of generating income post-retirement.