The Cycle Of Your Financial Life

We won’t call any names, but due to recent experiences, many of us like to ask our investment advisers, “So, how much interest do you pay each month?” And even if you haven’t asked, you thought about it. The thing is, that particular question ignores one basic fact of financial life – the type of investment you really need depends on where you are in the life cycle.

Now, assuming that you sorted out your insurance and cash reserves requirements – which are really the basics of financial plan, we can begin the discussion of investing to maximize your return and minimize your risk. And let us say right here that it is best to speak to a licensed financial adviser to help you determine your return and risk requirement.

Where you are in the life cycle, determines where you are best served by your financial adviser. Typically, younger persons can invest more aggressively so that they can grow their funds to meet their needs. But what if you are uncomfortable with risk? Then no matter your age, you will look to more conservative investment options. For those in retirement, years of savings can be wiped out by poor investment decisions or in the case of global meltdown, actions that you have no control of.

That is why, a complete financial plan is important. But prior to getting there, it is important to have an understanding of where you are in your life.

Accumulation Phase
The ages of 25 to 35 are considered the typical accumulation phase. Now some of us are late bloomers and so don’t really start to get serious until the big 4-0. That said, during this phase, it is characterized by the following constraints:

• Early to middle years of working careers
• Net worth is typically small
• Debt is typically large (courtesy of student loans, car loans, etc.)
• Long investment horizon
• Focus on accumulating assets to satisfy immediate needs (deposit for house, children’s education, etc.)

Consolidation Phase
They say that life begins at 40 and so does the consolidation phase. Actually, financial experts consider this phase to actually begin at 45 and are characterized by the following:

• Past the mid point of their working careers
• Have paid off much of their outstanding car and student loan debts
• Mortgage is main debt burden
• Balancing children’s education with retirement planning
• Income typically exceeds expenses
• Investment horizon is still long with 20 to 30 years before retirement

Spending/Gifting Phase
These days, retirement from one career might be the beginning of a whole new career. The traditional view of retirement where by you are simply sitting around and doing nothing is a thing of the past. Nevertheless, there are some characteristics that define retirement:

• Health care expenses are a greater part of income
• Income comes from early investing activities or company/state pension
• Greater concern about capital preservation while balancing exposure to inflation
• Excess assets can be used to assist friends or family

Building Your Cash Reserve

Open any newspaper or go on the internet and no doubt you will see something about the economical turmoil that we are facing. A steady diet of depressing news is on the menu and one can feel like there is no way out.

But that is just a feeling. The reality is you control your reality. Who decides on how much money you spend each month? Who decides whether you should go back to school and improve your skill sets? Who decides on the type of car that you drive? Who decides when you are going to use your credit card? Who decides if you are going to pay more than the monthly minimum on your credit card to save on interest charges?

And while you are still contemplating to the answer above, we can also say that one fact of reality is that it is unpredictable. Emergencies occur, expenses pop up out of no where, and investment opportunities present themselves. Yes, even in this economy, there are investment opportunities – if you look around and are in a position to act.

And that ladies and gentlemen, is the rub. Are you in a financial position to seize investment opportunities? Can you pounce on deals while being prepared for life’s unpredictable events?

If the answer is “no”; if you feel like a victim of the economy, then it’s time to do something about it. And really, it is all up to you. We have already discussed the security blanket of insurance that covers death, health, disability and the like. The next step in financial empowerment is a cash reserve.

The financial experts say that you should have six to eight months your living expenses in cash put down. This will tide you over and give you peace of mind, especially in this current situation we are in.

Many will question – how can I save when I have so many bills, so many expenses that I have to meet? Well the simple answer – and most difficult implement – is to treat your saving goal like any of your other bills.

1. Review your spending habits – be ruthless and cut out what is simply not necessary.
2. Set up a salary deduction for 10% of your salary – out of sight, out of mind.
3. Direct your savings bill to an instrument that pays interest. Let the money that you a putting away earn something. It doesn’t make sense for your investment to simply sit there and not grow or earn a very low rate, especially given where interest rates are low.
4. Do not touch the money!!! If you are drawn down on it, how will it protect you later on?
5. Once you reach your savings goal, it is time to consider investing in opportunities for the long term.

When you are feeling helpless in the face of economic turmoil, it is easy to rationalize not saving. But that is really giving away your control to others. So, speak to your licensed financial advisor about ways to manage your funds so that you can build your emergency funds and manage the economic storm that we are in. Building a cash reserve is an important investment in your future.