We learn the most basic skills like picking up a spoon and walking, in our toddler years. As we mature, we learn more complex skills like reading and writing and how to study diligently for examinations and do well on them. The same holds for financial planning, which requires years of study, implementation, and practice. Maintaining and increasing one's wealth throughout one's life demands a thorough understanding of finances. Individuals with a thorough understanding of the process at each level can grasp it and succeed at it.
Human life from a financial planning perspective is divided into four stages. As each stage ends, a new one opens up, planning at each stage and the accumulation of money at these stages shapes our future. Throughout these four phases of our life, money plays distinct functions. As an individual, one must be aware of the life liabilities and funds required for various purposes at different stages of life. Understanding the financial life cycle enables you to better organise your spending and saving habits as part of your wealth management. You will experience a similar financial life cycle, whether an entrepreneur or an individual, even if the specifics are different.
There are four primary stages of the financial cycle, with every phase having different goals. Principal objectives change throughout your life with rising age, income, dependents and life liabilities, but the majority of aspects of sustaining financial health always play a critical role.
The financial life cycle is divided into four different stages:
Education & Income stage (18 to 25 years): This stage focuses on skill-building, learning money management, and inculcating saving and investing habits.
Dependent Stage (26-40 years): This stage challenges you. One has to take up financial responsibilities of the family, increasing savings and focusing on asset allocation towards equities.
Growth Stage (40-60 years): Here, your debt levels decrease, and savings and investment stabilize. One can start investing vigorously in compounding.
Retirement Stage (60+ years): You've finally reached the time to reap in full what you've sown! Here the aim is to safeguard the corpus from inflation.
Let’s discuss each stage in detail :
Education & Income stage (18 to 25 years):
The primary goal of these years is skill-building via higher education, training and on-job experience. To prepare for additional education and work opportunities.
This phase is the ideal moment to learn about the value of maintaining a budget, saving goals and investing savings.
You can do a few things at this stage: Start the habit of reading, be it books or newspapers, create an emergency fund, avoid debt, learn fundamental investment activities, and start building credit. Study the fundamentals of money management by investing in mutual funds, fixed deposits and fixed income securities, inculcating saving habits and budgeting to ensure efficient use of money.
Dependant Stage (26-40 years):
At this point, both your income and your spending will have gone up, and you'll know how to plan and save money better. Invest the money saved to build a corpus that meets growth, income, or cash flow goals. The most important thing to do at this stage is to save money for the costs of having a home, kids, etc. Here, as income goes up, so does the amount of debt. This phase will be the most important for financial planning because your savings need to grow faster. This means that you should have a higher asset allocation towards equity with a disciplined approach to SIPs. Stick to the budget if you want to save money for short or medium goals you may have at this point without taking away an eye from long-term goals. Change your budget to fit your income and savings needs. If you put this off, hire a professional to help you do it diligently and satisfactorily.
Growth Stage (40-60 years)
If you have managed your personal funds responsibly up to this point, this will be the apex of your financial situation. Your income would be high and rising, while your spending would have stabilised, resulting in a growing savings account.
Managing investments is crucial in the present circumstances. This is also the time to catch up on crucial goals, such as retirement, using the additional savings. Where objectives are far in the future, investments should show a willingness to undertake more significant risk for larger returns for a longer period of time.
One can start planning for future aspects like Children’s higher education, marriage and even their own retirement. Consistent compounding portfolio with larger corpus while allocation towards equity would be higher, but the safety of capital would be of utmost importance.
Retirement Stage (60+ years)
At the onset of retirement, it is crucial to simplify finances. This would involve reducing the number of accounts and investments, organising records, updating information, and consolidating investments into a few essential accounts. Ensure that all of your financial records are accessible and up-to-date. Utilise your limited time, money, and energy most effectively by focusing on the necessary and crucial activities at this stage of your life.
The goal now is to keep costs within the budget. At this point, managing investments to generate income and safeguard the corpus from inflation becomes the main focus. Asset allocation moves more toward fixed income securities with minimal (15-25%) exposure to equities.
Wealth management involves addressing an individual's entire financial situation. It's not only savings and loans, business, or market investments. It involves putting everything together and formulating a plan to generate, conserve, and pass on wealth.
This demands the creation of a plan with the assistance of trustworthy advisors that is adaptable enough to evolve over time. It involves recognising one's life liabilities, generating consistent returns while adhering risk tolerance and managing risk.
We at Tikona Capital are a SEBI registered Investment Advisory specializing in Model Equity Portfolio, Financial Planning, Goal planning and Asset Allocation. Reach out to us to learn more about how we can help you get started today.
But why choose us?
We have over a decade and a half of experience in handling Rs. 2000cr+ Equities, Investments and Equity Portfolio Management, working with top financial institutions of the country like Aditya Birla Sunlife Insurance Co Ltd, Star Union Dai-Ichi Life Insurance Co Ltd. and Tata Consultancy Services Ltd.
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Sumit Poddar
Chief Investment Officer & Smallcase Portfolio Manager
Tikona Capital
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