Running up a credit card debt that cannot be squared off at the end of the month is not desirable, but it can be handled by a 25-year-old who just started her first job. She will be receiving a salary and probably has a few other expenses to worry about. If not this month, she is confident of squaring it off soon, even though she may need to pay additional interest as months pass.
For a 70-year-old retired widower though, it can be the proverbial last straw. He does not have any new sources of income and is living off the savings he banked over a full working life. He needs careful budgeting to ensure he has enough money to support himself for the rest of his life. A sudden extra expense in the form of interest can upset calculations. If at all he needs to spend more money, he would rather do it from the money in his bank account. The interest foregone will be lower than the interest charged on an unpaid credit card bill.
It is clear from the above example that financial decisions are based on an individual’s unique situation in life. Among the various factors influencing financial planning, age occupies a position of prominence, requiring an adjustment to the strategies one adopts in making these decisions.
The upcoming book “Personal Finance Essentials You Always Wanted To Know” deep dives into the world of financial planning for all individuals, no matter what stage of life they are at. This blog is a gist of the considerations that people in different age groups have for managing their personal finances.
The New Adults (18 – 30 year-olds)
In most cases, this is the period during which external support comes to an end and one begins to live independently. It could be a time when one needs to pay off the debts taken on for the purpose of education. The pursuit of higher studies to boost earning potential is also considered and, if found suitable, implemented.
The focus should be on paying off student debts, if any, and creating a foundation for savings. This is the time when personal responsibilities, and expenses, are low, and it is possible to put away earnings. The earlier one starts saving the longer the runway it gets for growth and flight.
Adulthood often comes with dealing with financial statements with no previous experience of it. Components of Financial Statements will help you get your basics cleared.
The Mid-Career Tricenarians (30 – 40 year-olds)
This is the age where hopefully, the experimentations of early adulthood are over and one is settled into a life of one’s choosing. In short, you are now an active part of the commercial world, receiving money for your contribution and efforts, and paying money for buying the products and services produced by others.
Responsibilities tend to rise during this period, with people starting families, buying homes, and having children. This increases the expenses. However, this is the time when one would also experience a rise in one’s stock.Long-term decisions like a home mortgage, children’s education, and insurance coverage may need to be taken during this period. A home mortgage leads to the acquisition of and creation of equity in a home, generally the single largest asset for most individuals.
The Peak Agers (40 – 50 year-olds)
This may well be a continuation of the previous stage, excepting that you are likely to be better placed in financial terms with a rise in earnings while witnessing the build-up in the value of assets like home equity.
Some people could use financial leverage to create larger assets, like trading the earlier house for a larger one. Some may need to put away money for foreseen expenses like the college education of children. Others could use this leverage for building more in terms of financial assets. It must be remembered that financial assets are what you will be relying on for earnings during your retirement years.
The Pre-Retirement Folks (50 – 65 year-olds)
You will probably see your children become adults and leave the nest at some point during this phase. Some of your responsibilities will start coming down. However, some expenses, such as healthcare, do not come down. Also, it is difficult to reduce expenses related to the lifestyle that you have become used to.
This is the time to assess your financial decisions and make changes, as required. You may also need to review your lifestyle and gradually move towards one that you will be able to sustain for many years during retirement. You don’t want to suddenly have to step down to a lesser lifestyle the day you retire. Your money accumulation rate could increase once again as your responsibilities decrease. However, at this stage, knowing that retirement is nigh, you are likely to be more responsible in your use of that money.
The Post-65 Retirers
Time to sit back and relax?
Physically yes, but financially no. Though the accumulation phase of your life is behind you, you need to continue to strive to ensure that you are able to lead a life in retirement that you wanted to and set yourself up for. This includes ensuring that you watch your expenses, and also review your investments to ensure they are yielding the right results. If not, you may need to move them around.
You also need to take critical decisions such as optimization of the social security claim and estate planning that would smoothen the process of transition when you are gone.
Retirement also opens new doors for you. Read How To Get Back To Work After Retirement to know more.
It must be noted that these stages are illustrative in nature. Many people go through one or more of these. At the same time, there are many others who do not adhere to them. Each person’s situation is unique, as is their capacity to handle risk and variance. A careful evaluation, supported by consultation with experts where required, should be the basis for financial decisions.
Vibrant Publishers’ “Personal Finance Essentials” guidebook will help you understand everything related to money management. A financial journey can begin at any stage of life and it is the first step towards gaining financial independence and creating a secure future for yourself. Good luck!
This blog is written by Ankur Mithal, author of the upcoming book Personal Finance Essentials You Always Wanted To Know.
About the Author
Ankur Mithal is a widely experienced business professional. In over 15 years with Standard Chartered Bank, he worked in Sales, Project Management as well as Operations, operating out of Kolkata, Delhi, Hong Kong, Mumbai, and Singapore. He was involved in a number of improvement interventions in the BPO industry that straddled the disciplines of Organizational Development as well as Quality which created interest and enabled him to learn about them. He is also the author of Organizational Development Essentials by Vibrant Publishers.