5 Stages of Financial Planning
Earlier this month, Aquarius magazine approached me to write an article on financial planning. The following is an excerpt from the article which is in this month’s magazine. The article is about the key stages in a person’s life and what financial planning milestones exist along the way, check to see what you should be considering…
20’s Laying the Foundations to Financial Security
In your twenties, you may start your first job and begin to receive more money than you have ever had before. By adopting good financial habits at this point your will set your finances on firm foundations. When you get that first job you should make sure you save for the short, medium and longer term: short-term for everyday emergencies, medium for a project such as future property purchase and long-term for retirement. You should also avoid unnecessary debt. For example, a car loan is acceptable if you need a car to work but credit card debt and a permanent overdraft are symptoms of overspending and so are not acceptable.
Making sure you are financially independent is important, being able to pay the rent and other bills regardless of whether you are working is vital. Having money in a bank account will help tide you over short periods between jobs whilst income protection insurance will provide an income during long-term illness or disability.
Whilst resident in UAE, medical insurance is very important as medical bills can be very high and unexpectedly wipe out savings built up over years in a matter of days.
30’s – Starting a Family
In your 30’s your career is getting underway and you may have bought your first property, got married and started a family. Owning your own property often involves a home loan or mortgage. It is essential that this liability is paid in the event of your death or serious illness to avoid your family losing their home.
If you are a parent, it is important that you make sure your family is provided for financially if you were to die or suffer a serious illness that prevents you from working or taking care of them.
Education expenses such as university or boarding school should be considered as soon as your children are born and reviewed regularly.
Often this is the decade when expenses can sometimes exceed income and a firm hand must be kept on the expenses, especially when children are born and mothers’ income reduces or stops as she either gives up work or works part time.
At this stage you should write a will if you have not already done so and retirement planning should be reviewed and medical insurance provided for all family members.
40’s – Growing Family and Consolidating Plans
Your 40’s typically represent you peak earnings years. You may move to a larger property to accommodate a growing family which will need a review of your home loan / mortgage requirements and life assurance.
Education Plans and Retirement Planning become more important as your asset base grows.
50’s – Reducing Risk and Repaying Debts
Home loans are often finished during this decade enabling greater retirement investment. However significant costs such as children in university will have a large impact on the ability to save unless planning has been put in place when the children were young.
After finishing university, the children may move back in with Mum and Dad before they find their first job and start financial planning themselves.
Those wishing to retire in their 60’s will now be looking at reducing the amount of investment risk they are taking within their portfolios to preserve capital and not to seek aggressive capital growth.
You may also receive inheritances which you may wish to put into trust for future generations.
60’s – Retiring and Changing Investment Strategies from Accumulation to Income Generation
With children now having left home often the large family home is no longer required and so people sell their property and move into something which is smaller. This has the benefit of releasing capital held within the property giving an added boost to retirement savings.
When you retire you realign your portfolio from capital growth and preservation to income generation. By starting your retirement in your 60’s it could easily last 20 years or more, so planning is important.
If it is relevant you should also consider Estate Planning, if you have not already done so, to make sure, as far as is possible, that those you wish to benefit from your assets on your death do so.
You may wish to bequeath assets to your grandchildren to help with their education for example.
I hope that the above is useful. As always please let me know if you have any comments or concerns.