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

Investing Basics – Four Things You Must Know

Although most of us use the terms “saving” and “investing” interchangeably, in reality they are two completely different concepts. Remember, you should save; however, you do not have to invest. When you save a portion of your money in a regulated deposit-taking institution, it is insured to a limit. On the other hand, when you invest, you are taking a risk that you could lose your entire principal. Investments offer a higher return for your willingness to take that risk. That is the nature of investments.

1. Your savings, obligations and age matter – a lot! In other words, you should not invest until you have saved and given yourself a comfortable cushion. In the current environment of rising cost of living and job losses, aim for a minimum of 12 months. If you have high expense obligations, then you cannot afford to risk money that you could lose (remember, that is what an investment is). The older you get, the less risk you can afford to take with your funds, because your potential working years are declining as you near retirement age.

2. Only invest in products and services you understand. How many times have people tried to convince you about a “sure thing”, and told you “here’s a hot tip’? It may very well be, but if the person telling you cannot explain the investment and why it’s such a “hot tip” or a “sure thing”, then those are grounds on which you should doubt it. And, it would be prudent to understand what influences the investment – what external factors are likely to make the investment do well or do badly. No one is expecting you to be an expert, but it’s your money, therefore you should be able to evaluate if what the “expert” says make sense.

3. Be conservative and invest with solid reputable institutions. We are living with the certainty of uncertainty. Safe is better than sorry. Therefore, you need to do your due diligence and resist the temptation to be lured by the promise of unusually high returns, when you may have doubts about the strength or soundness of an institution. Remember, regulated institutions are monitored while regulated institutions are not. And, return of principal is just as, if not more important than return on principal.

4. Know Yourself. Believe it or not, this one of the most critical things about investing -knowing your own risk tolerance. You may get a great tip, understanding what the investment entails, understand that it’s an investment (as opposed to savings), and be comfortable with the institution, but the product may just be too risky for you. On the other hand, remember that not all investments carry the same risk, and some may just be right for you, once you have sufficient savings tucked away.