Two weeks ago, we considered the importance of managing your money in line with your projected financial life cycle. Today we will look at specific circumstances of different stages in the financial life cycle.
First, a young person, say, a 28-year-old, can take a greater risk in investing savings as compared to a 60-year-old. The 28-year-old can take a greater chance in going after growth by investing in equity-type investments. Investing in shares or through a mutual fund would be an attractive option. There is potential for higher return on the investment, yet there is likely to be higher risk exposure should the related company fail or if the share value plummets.
For the younger investor, even if there is a financial setback, youth provides the time and opportunity to fully rebuild in the years ahead.
On the other hand, a 60-year-old will tend to invest more in fixed income-type investments like bonds and term deposits. This type of investment will provide sure and steady retirement income which may be needed in retirement in order to maintain an acceptable lifestyle. Taking the risk of losing capital on an equity investment is not an option because there is little earning time left to recover.
Similarly, by, say, age 50, with proper planning most of the drains on income such as the cost of the care and education of children will either be fully taken care of or well managed through funds set aside.
With release from these drains, additional funds may then be put towards one’s retirement plan.
A personal retirement plan will help close the gap between National Insurance pension from work and what you will needed to maintain the standard of living that has become the norm while at work.
Expecting and understanding this peculiar part of the financial life cycle will provide the motivation to start saving early for long-term success. It is up to you to create a vision of your financial future and work towards it. Many single people with modest incomes have managed to have a superior lifestyle by careful planning and having the motivation to stick to their plan. You can, too. A careful consideration of your projected financial life cycle will help you to be realistic in planning and in leveraging whatever income you earn.
It would be helpful for you to prepare your own chart based on where you currently are in your work life. Plot your age along the X-axis and your income along the Y-axis. Then make the projection of what you expect of your financial future over the rest of your life.
Finally, extend your personal financial planning by estimating how you can hold on to as much of that income as possible towards strengthening your position of being wealthy. Even better would be planning to increase your annual rate of earning income. Your income may be increased by getting a better job, better qualifications, moonlighting, training which will allow you to do a better job or by working for yourself. However, a change in employer may affect your pension benefits, so you need to weigh these options.