Think about who you were five, or even ten years ago. Have your priorities changed in that period? It is important to adapt your financial planning as you go through life and accumulate wealth. Here are some things to think about as you go through the various financial life stages:
Stage 1 – Young adulthood
This forms part of the accumulation state and would involve contributing to a pension. This is much easier than it was a few years ago because many employers have auto-enrolment schemes. Don’t get left behind if you are self-employed!
Staying out of debt and building your savings is crucial in the accumulation stage. Getting deep into debt using credit cards and loans is a big no-no. The only acceptable debt would be your student loan. Avoid debt if you can and use your income to build your savings.
Stage 2: Middle adulthood
A lot of people say this is when things start getting serious. Far from it! You can still have fun, but certain decisions could go a long way into determining how fondly you look back at these years. You’ll be looking at getting a mortgage, buying a house and perhaps starting a family.
Set financial goals. Determine when you’d like to retire, how much you’d like to retire on, and put a plan in place. Make sure you have the right insurances in place to protect you and your family (if you have one) from financial disaster.
By accumulating wealth and having a savings strategy you’ll be better equipped for the many unpredictable events that happen in these years. Build your savings reserves invest for the long term and reject non-mortgage debt.
Stage 3: Peak earnings:
This is still the accumulation stage and where you really should be directing as much as possible into tax efficient savings plans such as pensions and ISAs. Insuring your income should also be a priority ensuring you’re building your castle on solid foundations.
As you get older, you may want to re consider the risk level of your investments. At this stage, you would have less time to recover from potential market falls than you would at stage 1 or 2, so diversifying would make sense.
Stage 4: Financial independence:
The definition of financial independence is “the ability to live from the income of your own resources”. When this happens, you experience freedom of time and freedom of money. If you’ve applied yourself well in the previous life stages, you should be able do all the things you want with money no longer being a worry.
Stage 5: Decumulation
How quickly life sweeps by! With your mortgage paid off, the kids grown up and gone and just yourselves to think about, it might be time to consider downsizing and sharing some of your wealth and wisdom with the next generation.
Decumulation is the point where you start taking income from your investments and pensions. You may consider your inheritance tax position and make gifts to the next generation. Make sure your Will reflects your wishes. Most importantly, enjoy your hard-earned wealth – don’t be embarrassed to spend it! You’ve earned it and certainly can’t take it with you!