Financial Needs Change Over Time

Financial Needs Change
Over Time

How to Make a Financial Plan

Just as a child’s needs change over time as he gets older, your needs change too. That includes financial goals and needs. But by anticipating your needs, you’ll be better prepared financially to meet them.

Most people go through the following four stages of financial life:

  • Young adulthood (20s)
  • Building a family (30s)
  • Middle age: your career peak (40s and 50s)
  • Retirement (60s and beyond)

Let’s look at each one.

Starting out: Your 20s

You’re done with college, and are now starting a career. Independence is a priority. There are so many things you want to do: have a high-paying job, buy a car, take graduate studies, meet your soul mate, see the world and do your share to save it too. You now have your own credit card that opens doors for you to buy the things you’ve long wanted.

Typically, people in their twenties have a lot of plans but do not have enough income to turn these into reality. Saving may not be a priority; enjoying life is. But the sooner twenty-somethings realize that having great money management skills will make life more enjoyable, the better.

Here’s some wise advice for people at this stage:
  • Start saving. When you receive your pay, take out a certain amount (say, 10 percent), and deposit it in a savings account. Once you have accumulated enough savings, transfer the bulk of it in a higher-earning deposit account that allows emergency withdrawals. Let this money grow. Compound interest will make it grow substantially.
  • Get health insurance. If your company does not offer health insurance as a benefit, make it a priority to get one. You’ll never know when accident or illness may strike.
  • Get life insurance if you are married or with kids. Ensure that your dependents will not be financially burdened when the time comes for you to go.
  • Think of going into investment options, such as bonds and mutual funds. Once you have established your emergency cash fund (see number 1 above) and have insurance, look for a mutual fund or other investment scheme that may help you grow your money even more. Stocks may be an option if you can lock your money for a minimum of five years.
  • Go easy on debt. Take only enough debt (including credit card debt) that you can pay.

Getting established: Your 30s

You’ve progressed in your career and may be in a supervisory or management position. Or you may be running your own business. You may thus be earning more now, enabling you to lay the foundations for future wealth.

"By anticipating your needs, you’ll be better prepared financially to meet your goals."

But this may also be the time you’re starting a family, so expenses may be high. You may have bought your first home. You may also be looking after your parents.

Here are a few tips for you:

  • Plan how to pay for your children’s education. Look at options that will give you yields higher than a time deposit would. Examples would be an endowment policy, mutual fund, or bonds.
  • If you haven’t taken out life insurance, do so. Make sure your dependents’ needs would be taken care of when you die.
  • If you haven’t done so, get health insurance. This will help you meet medical expenses.
  • Make sure you have enough cash in your emergency fund. A good amount would be equal to six months’ or a year’s income. Place this in a time deposit or money market fund for easy access.
  • Save for retirement. The sooner you do so, the more it will grow. You can do this via a pension plan, insurance, mutual fund, stocks or bonds.

The investment peak: Your 40s and 50s

You’re at the top of your career and earning so much more. Your children may be in college or are already working. Retirement is just around the corner. Most likely, you’ll have more money you can allot to savings now.

Here are a few tips for you:
  • Transform much of your income into investment capital.
  • Review your investment portfolio and determine if you need to allocate your funds into investments with higher earning potential. See if you’ll have enough to sustain your target lifestyle at retirement.

Reaping the rewards: Your 60s and beyond

Your children are well on their own. You may have finished paying for your home. You are at an age when you can retire, or still work if you want to. Your expenses may be lower, although health care expenses may now be higher.

If you have prepared well financially for this period, you may be able to live on the interest income from your investments or from your pension. If not, you may have to withdraw from your investment capital, which will make it smaller, thus giving you a lower yield.

Here are a few tips:
  • Protect your capital. You’ll never know how long you will live—who knows, you might reach 100! If that’s the case, then aim to preserve your capital so you can live on the income from it. See if you can go for higher-yielding instruments such as bonds. There is a risk that comes with it, but it also comes with a potential for higher income.
  • Make sure your will is in order.

In a nutshell

To recap:
  • When you’re young, your expenses are high and saving is difficult. But it’s essential to start saving early to ensure financial stability.
  • Your ultimate goal should be to have enough financial capital to sustain your target lifestyle after retirement.
  • Make plans to meet your medium-term goals in between starting out and retiring. This may include paying for your children’s education, or buying a home or car. But make sure that your eye is still on your ultimate goal: live a comfortable life in retirement.

Copyright All rights reserved. This material may not be published, broadcast, rewritten, or distributed.