There is a common saying that every 5 years, 80% of people around you both in social and professional circles change. While it might not be true for everyone, this belief highlights something we all go through in our lives – change. From priorities to how we deal with situations, everything evolves. These changes in our lives also have a bearing on how we look at our money and investing.
In this blog, we divide life into different stages and look at how you should approach investing in those life stages and also how you can make the transition between these stages smoother.
Variable Factors that Drive Changes in How We Invest
Before we get into different life stages, let’s look at some of the variables that influence how we invest.
- Income and its source
The first factor is income and its source. What is your income? And more importantly, what is the source of that income? Is it stable? Is it unstable? Will it sustain? Or is it possible that you may see some uncertainty? All these factors can have a significant bearing on how you plan your investments.
- Expenses
The second variable is expenses. At different stages of life, your priorities keep changing and so does your spending. Eventually, these expenditures can be a deciding factor in determining what would be your investment philosophy.
- Responsibilities
The third variable is your responsibilities. For instance, if you are a bachelor, you do not have many responsibilities. However, this is not the case when you become a parent or you near your retirement.
- Age
The fourth factor can be age. This has high relevance in investments, as your age often decides how much risk you can take.
- Market Dynamics
The fifth factor can be the current market and economic scenario. Whatever may be the first four factors, but the market and economic conditions have a very important influence on the decisions related to your investments.
Different Life Stages and How to Invest in Them
Now that you know these factors, let us look at different stages of life, model saving rate in these stages, where you can invest, and how much risk you can take.
- Bachelorhood
The first stage is bachelorhood. At this stage of life, you are very happy as you have a job and you are financially independent. You can spend money as you wish. You don’t have any major responsibilities.And you want to buy a bike or car, do a destination wedding with your partner, live a lavish life, and so on. But these desires also induce you to spend more than you earn. To avoid this mistake, you can save first and spend later. And your savings should be at least 30% of your income.
When you move to live’s next stage, the previous stage decides whether you will face financial problems. When you are a bachelor, you do not have any responsibilities. Age is on your side. A good way to invest at this stage is to go for mid cap orsmall cap funds. These funds can be volatile in the short to medium term, but over the long-term can generate enormous returns.
- Married With No Kids
The next life stage arrives after marriage. Normally expenses increase considerably during this time. And here, you have to be careful that even if your expenses increase, you save 40% of your income.
Post marriage, you need to align your goals and aspirations with your partner. It also means sharing assets and liabilities which requires clear communication with your partner. Draw the big picture of total inflow, outflow, investments you can make, and the risk you can take. At this stage, you will be able to take less risk than your bachelorhood as you need both growth and stability. Therefore, increasing your allocation to debt or balanced advantage funds by reducing a portion of riskier equity schemescan be a goodoption.
Apart from investments, you need to focus on securing your family against unfortunate events. Therefore, with additional responsibilities after marriage, the insurance cover needs to be revisited. Buy a pure-protection life plan. Also, change the individual medical cover into a family floater policy with a higher sum insured.
- Becoming Parents
The third stage of life is when you become a parent. With this joyful experience comes a higher sense of responsibility and an increase in expenses. Nevertheless, it is important to maintain your savings rate at 30%.
Now when you become a parent you need to plan for certain events. Education for your children, their marriage, and your retirement. In a way, some of your life eventualities are fixed. Therefore, it is important to start goal-based investing for these scenarios as soon as you become a parent. Define your goals, time horizon for the goals, and choose investment vehicles accordingly.
You can divide your goals into three buckets – short-term, medium-term, and long-term. For your short-term goals like travel, kid’s school fees, etc. you can go forDebt Fundsor evenFixed Deposits. Your medium-term goals like buying a car or collecting downpayment for a house are best served by having a mix of equity and debt. So hybrid funds likeDynamic Asset Allocation Fundscan be a good option. Lastly, for your long-term goals like kid’s education or your retirement, have a pure equity portfolio.
- Retirement
The fourth stage is retirement. By retirement, you would have almost completed most of your responsibilities. So, at this time responsibilities are very less. However, after retirement, your income is significantly lower, or in many cases, it is zero.
Meanwhile, this is not the case with your expenses. In fact, rising medical expenses can increase your total expenses in a big way. Further, your investments should be kept to a minimum with less risk. Therefore, your return on investments, your sources of income, the returns that you wish to generate will depend on the amount you accumulate prior to retirement.
Investment Transition Amid Changing Life Stages
We as human beings resist change. Suppose you are a bachelor and spending quite a good amount of money on yourself. But, all of a sudden you are married and your responsibilities have increased. Now, if your income is nearly the same as it was during bachelorhood then you will need to cut down your expenses. And this shift from one stage of life to the other can be difficult. Hence, keep in mind that none of these changes should be sudden.
Life-stage planning can ensure a smooth and gradual transition from one life stage to the other. To that end, you can create a model portfolio for every life stage. Do take into account the variable factors we discussed earlier. For instance, if you are salaried and your company is doing reasonably well, then your income is stable. But if your company or sector is not performing well, there is a bit of uncertainty even as you are a salaried employee. Therefore, the portfolio and investments will be different in both cases.
Another important factor to consider is to take your family members along. An increase in your salary may raise their expectations on how they want to live. In such a scenario, It is important to explain the need to maintain your savings rate. And how it can be crucial in securing the future.
Bottom Line
Life-stage investing ensures that how and where you invest your money are in-line with changes in your life. More importantly, it also gives you an opportunity to relook at the risk in your portfolio and take a call on how much and when to reduce it as you age.
