Financial Life Cycle Part 2

…………..Continued from last week

Stage 3: Accumulation

This is typically between ages 20-30. At this point, typically a person has started working and has some disposable income. Income is typically larger than expenses at this stage. Some may live with their parents while some may begin to consider getting their own accommodation. This is also a stage when people begin to think about settling down etc. Needs include gadgets like smart phones, cars, appliances like dvd players etc. This is the best time to begin to develop a personal financial system.  The earlier you start the more time you have for your money to grow and enjoy the benefits of compounding.  I love Albert Einsteins quote which says “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t pays it”. Basically compounding interest simply means that the money you earn as interest is put back into your account or investment thereby allowing your money to grow faster. An individual at this stage should develop a savings and investment culture, learn and practice the principles of personal finance which is budgeting and also consider setting up an emergency fund. In terms of investing this is a good time to invest in riskier assets.

Stage 4: Consolidation

This is typically between ages 30-55. At this stage your expenses are rising higher than your expenses. You may be married or starting a family. You may have moved out of your parents home and live on your own. Needs include education for kids, rent, mortgage, planning for retirement, higher education etc. Financial discipline is required at this stage. It is important to be strict with budgeting and not forfeiting savings and investments. In terms of investment it is also important to begin to diversify your portfolio. This is also a good time to take some risks depending on the side of the spectrum you fall on.

Stage 5: Retirement

This is age 55 and above. At this stage most individuals would be retired. In most cases there is no steady income except from pension allowances. Needs include healthcare, retirement home, vacation, maintaining a standard of living, estate planning and leaving a legacy.

Please note that these age ranges are just a generic template and not cast in stone. Individuals may past through these stages at different ages.

Once you have determined the stage you are in your financial life cycle and set a goal it is important to determine action steps required to achieve your goal. An important point is to ensure that you create a plan to achieve this goal and that your plans are as flexible as possible.

Example

Goal: Set-up an emergency fund of 6 months’ worth of living expenses by 30/12/14

Action Steps:

·         Track spending

·         Create a budget

·         Pay-off all outstanding debts

·         Reduce excess spending on eating-out and eat home-cooked food

·         Reduce spending on aso-ebi

·         Set-up direct debit with bank