Financial planning in your 20s is very different to financial planning in your 60s. So what's the key to a wealthy life? We outline the best ways to plan your finances for all the stages of your life.
The financial concerns that may keep us up at night when we are in our 20s are likely to differ from those in our 60s. What this tells us is that wealth planning and management are not static. We have very different needs at different life stages. So what are some of these stages and how do they interact with each other?
The early years
Let’s start just after graduation – your early to mid-20s. Here your outgoings are likely to be fairly modest and straightforward. However, you may, depending on where you study, have considerable debts from your education. So one big question you should address is the most efficient way of paying these down. Depending on the nature of the loans, the country you are based in, and your appetite for risk, it may be advantageous to pay your loans down slowly and use the money to make investments – or vice versa.
You should also be thinking about retirement. While this may seem a lifetime away, the savings you make in your 20s, although probably modest, are also those which will have the longest to grow. Finally, in your mid to late 20s, you should start to accumulate wealth and consider pension options. Your income may be rising fast, but you have few responsibilities. You may buy your first car or take a trip around the globe, but it is also the time to start laying the foundations of financial security.
Your late 20s and 30s
Financially speaking, in your late 20s and early 30s things are likely to get a lot more interesting. For starters, this period is the one when you experience the fastest income growth. By your mid-30s, you will not have reached your peak earnings, but you may well have a reasonable idea of what they are might be. This will help you plan your future.
It is during this period that you are likely to gain significant responsibilities, too. You may have bought your first home, perhaps with the help of your parents, and have some equity in it. If you are in your mid-to late 30s, you may be planning on moving to a larger home or even buying another property.
Finally, it is in their 30s that many people start families. So you need to begin thinking seriously about income and outgoings. Along with the house, you will have dependents. You may wish to start planning for your child’s education, up to and including third-level education. More immediately, you may have childcare costs or the prospect of going down from two incomes to one.
This is why you started to lay the foundations of financial security early. However, assuming you have the means, you should continue to accumulate wealth and plan for retirement. Your investments at this stage of life should cover a sensible spread of risk and growth with a view to achieving your financial objectives, whether they are early retirement, buying property for your children or downshifting.
Inheritance and your own children
Your 40s or 50s is also the stage where you may reasonably start to expect an inheritance. With luck and good advice, your parents will have structured this so as to minimise tax. However, you still have the question of what to do with it. Possibilities include investing, topping up pensions and funding everything from your children’s education to property and trust funds.
However, you may find yourself with the reverse of an inheritance - having to fund care for elderly parents. Longer lifespans mean many 40s-somethings find themselves in this so-called sandwich where they are supporting both their parents and children.
The choices you make
There are other choices too. In your 20s, 30s and 40s, you may decide to set up a business. If you are going to do this, you need a considerable financial cushion, both to offset some of the start-up costs, and to cover your outgoings and the income you will forgo as the business gets off the ground. In a similar but less dramatic vein, you could choose to engage in further education, perhaps an MBA.
Shifting your focus to retirement
By the time you are in your 50s, retirement starts to rise up the agenda and you need to shift your focus towards this. However, you will still have years of work ahead of you and your income is likely to be healthy. As you move into your 60s though, providing for a comfortable retirement should be your primary focus. Moreover, you need to be thinking about healthcare for your own later years.
Your golden years
In your mid-60s, you will probably retire or at least step back from day-to-day work and start receiving pension payments. This is the final stage of wealth management. If you are very wealthy, you may be looking at effective philanthropy and gifting of some of your wealth. For everyone, estate and succession planning become an issue.
Finally, it is worth remembering that, no matter what stage of your life you are in, you should conduct regular financial reviews to check that you are on track to achieve your goals and that your wealth is healthy.