By David Crossley, CFP® and Business Manager at BDO Wealth Advisers
In our lives, we face different challenges of a financial nature as we work through our own “Circles of life” – as the movie the Lion King would say. The more things change the more they stay the same and our awareness of these changes and how to plan for them will make all the difference to our families.
Change comes in all forms. From a financial perspective, let’s look at the changes an individual goes through and the actions that should be considered to ensure financial security now and in the future:
Tertiary Education (Up to age 22)
Before we graduate into full time employment we need to be aware of our financial environment and how we can use this to our advantage.
Financial wellbeing is all about one word – Planning. If we plan correctly and within our means, then life becomes an easier and more coherent journey.
Use the time at University to research the best ways to start the financial journey. Even though you may think that retirement will never happen, one day it will and having an awareness of it and planning for this life changing event, whilst it is so far away, will ensure that you graduate into retirement with sufficient capital to be financially independent.
Although you may not be earning at this stage of your life, the discipline of budgeting starts now. Practice the art and science of budgeting the stipend or allowance you receive – allocating between spending and saving. As small as the saving allocation may be, it’s the discipline and habit that is formed that will pay dividends in later years.
Starting work (23 – 28)
This is an exciting and challenging time!
Not only will you be earning a salary for the first time, but you will have graduated into the real world – one of deadlines, demands, challenges and routine. This takes some getting used to, but it is still important to sow that tiny investment savings seed right up front.
“Less is more” as the saying goes. The miracle that is compound interest (‘returns on returns’) will teach you that smaller amounts invested for longer terms will yield you a handsome reward if you stick to the savings routine. The savings habit is entrenched in this phase of your life. You will learn that savings is about paying yourself first before you spend. Implement a regular savings habit and you will thank yourself in your later years with a paycheck from your savings.
Maybe at this stage, you will purchase a car or even a small property and this will open the doors to acquiring some form of insurance in the event that you are not there to repay these debts. Yes – it is sadly true that young people can pass away tragically, and the last thing you want to do is leave your family with grief and financial liability.
Marriage and children (28 – 55)
Now things will really change!
Not only will you (hopefully) have met, courted and married your ideal partner, but suddenly your obligations have increased. This may mean a bigger property and inevitably more liabilities, mostly in the form of additional debt, the need to protect your partner and children in the event of your premature passing. Take advice on income protection, disability insurance and life insurance options to provide for these needs. Make sure you have a valid Will in place. This phase of life should be characterized by savings - ensuring that savings and investments are initiated to provide sufficient capital to educate any children that may come along. The cost of educating children continues to increase and sadly, quality education inevitably carries a correspondingly heavy price-tag.
Go back to your ‘Varsity days and the allowance your parents paid you or the petrol money they provided. This money didn’t just appear, it had to come from somewhere, never mind the costs of accommodation, tuition and transport.
At this stage of your life, you would do well forming a long term relationship with a financial planner. Someone who has an objective view on your relationship with money and the decisions that you take regarding money and your wealth.
The empty nest syndrome (55 – 65)
If you had children, they have probably left the nest – they have been educated and are now pursuing their own lives and careers. However, they may still need your financial assistance – are you still able to provide this without compromising your own financial situation?
In the meantime, you and your partner are probably still working but the prospect of retirement or at the least a reduction in your working levels is looming ahead.
Now is the time to add to that already growing retirement nest egg that you started in your twenties, with additional contributions to ensure that when you finally decide to kick the nine to five, you will be able to retire comfortably and do and experience the things you have always dreamed of.
You have minimal debt levels (hopefully) and more disposable income to save and spend. The need for Life Insurance (which is so important whilst your family was growing up) is no longer as important, so you may be able to cut down on this in order to feed more into your retirement investments. A good point in time to also revise and update your Will to cater for any changes in how you wish your wealth to be allocated to beneficiaries on your death.
Retirement (65 – and onwards)
People are living longer and barring illness, you are expected to live a full retirement into your 80’s.
Is there sufficient capital to sustain this? Shortage of money in your old age is a terrible stress and the last thing you want to do is have to live off the generosity of family. Your children are into the “Financial circle of life” themselves and need to develop this without hindrance and demands from you.
But of course you followed “the circle of life” and you have made provision for this way back when you started work.
There are of course other parts to this “circle” – when I pass away, do I want to leave a financial legacy for my children, for my wife or for my grandchildren?
All this is possible with the correct financial planning – and there are qualified individuals who have been trained to assist you to put together this “Financial Circle of life” with you.
Don’t rely on your own resources – engage the services of a competent, qualified financial planner to work through this plan with you – from the start of your working days and onwards.
Simba, the young lion in Lion King was well schooled by Mufasa his father who provided him with the wisdom to embrace his obligations and responsibilities. You can do the same!
Read more BDO Insights