For those who have entered their forties, life in itself is now a very enriching experience. There is now a certain kind of stability in your personal and professional life. Since you have obtained a wealth of experience in your chosen career by this time, you are more confident and successful in your career than ever before. As your kids are growing up, there is always a lot of excitement in your personal life. There is a saying that life begins at forty. This a time to learn new skills for the next stage of your professional development, pick up or renew hobby, get in to a healthier lifestyle, maybe even get a whole new perspective of life. This is also a great time to pause and see how you are doing financially. Certain goals are more relevant in this particular stage of life. Here are some important financial considerations in your forties:-
Eliminate debt including home loan: By the time you reach your forties, the only debt that you should have is your home loan. If you have any other kind of debt, like auto mobile loans, prioritize and pay them off with a high sense of urgency. Next focus on your home loan. As your savings increase with a rise in income, you should try to prepay your principal. Set yourself a prepayment target every year and prepay your principal at a regular frequency through-out the year or at least on an annual basis. The RBI today, said that the interest rate cycle is now peaking in India and we will see a gradual lowering of rates over the moderate term. This is a great time to prepay your principal, so that you can take the double advantage of lower interest rates and lower loan balance.
Ramp up your savings: You should set yourself a target monthly savings rate. With your income rising, saving a greater percentage of your income is really not that difficult. Look at your monthly subscriptions, memberships, cable TV services, phone services and credit card finance charges, among others. Evaluate, if you can cut down on some of these expenses, take advantage of more economical plans or negotiate a better deal with your service provider. Spending less is often about breaking bad habits. Irrespective of what you were doing in the past, now is the time to save at a highest possible rate, since this is the most lucrative period of your life from a savings standpoint. Once you are able to eliminate debt, you should be able to save even more.
Get your retirement planning goal on track: You have now reached almost the half way stage in your career. Though you still have some distance to go before your retirement, this is time when retirement planning should be one of your top financial goals. You should have set yourself a retirement planning goal and started executing on it in your thirties. If you have not, you should now approach the task with all the urgency it deserves. Retirement planning begins with a clear vision of your retired life. Would you like to travel, start a business, do charitable social work, and even replicate your current income in your retirement? Once you articulate your vision, your financial planner can work with you to put together a framework to know what it is going to take to get you there. Your employee provident fund savings will most likely be not enough to meet your retirement plans. You should target maximum contribution under public provident fund. A systematic investment plan is a great way, to invest for your retirement. At this stage of life, it is very important that you choose the right investment option. You need the superior equity returns to have a shot at success for your retirement planning. You should consult with your financial advisor to identify systematic investment plans that suit your risk profile.
Get adequate insurance: The forties are the time, when the first warning signs on the health front come up on the radar. The cost of health care is ever increasing, and even if your employer provides for health coverage for you and your family, you must ensure that the coverage is adequate. A very serious illness or accident may also impair your ability to work at a time when your earning power is at its peak. You should consult with your financial planner and take up additional medical, disability and life insurance, if required. While insurance premiums will be more expensive compared to when you were younger, the financial stakes for you and your family are also higher now, and so you must be adequately insured
Focus on building "assets": With excess funds available, as a result of your rising income, it makes sense that you invest in assets. However, we need to get the definition of "assets" very clear. From a finance perspective, assets are items that generate current or future cash flows. If it does not generate current or future cash flows, it is not an asset. For example, car owners may be tempted to buy a second or third car for your families, but you should apply careful consideration. At the end of 5 years, a car depreciates to less than 50% of its purchase price, the same money invested even in a high yielding debt fund is likely appreciate more than 50%, over the same period of time. If you are a current home owner, you may consider, buying a second house to get you rental income and capital appreciation over a period of time. When making investments in assets, you should consider the trade-offs income versus capital growth, risk versus liquidity, tax efficiency versus short term capital gains, and make appropriate investment choices based on the requirements of your financial plans. Certain assets, like commercial real estate, requires special expertise in managing, and you should avoid such assets, if you do not have the required expertise
Asset Allocation is important: With retirement approaching in a few more years, understanding your risk profile is very important, so that you can make wise investment decisions. Generally, as one grows older, one should rebalance their portfolio mix, towards less risky assets like fixed income. However, careful analysis is required in your forties. With your retirement still 10 – 20 years away, it may not be wise to give up on equity investments altogether. At the same time, it is not prudent to put all your eggs in the equity basket, especially if you have some short term goals like house purchase, paying for your child’s higher education etc. That is why, it is extremely important that you have a robust financial plan. There are a wide variety of investment options available in India today, to suit most of the needs in your financial plan. You should consider fee based financial advisors, who do not restrict their advice only to products where he or she earns commissions, but advise on the entire spectrum of products available in the market.
Focus on tax saving: As your income rises, so does your tax liability. You should explore all tax saving opportunities available within the provision of Income Tax Act, to save every rupee possible in tax obligations. As far as your investments choices are concerned, make sure you choose the most tax efficient option. Investment returns from instruments like VPF, PPF, ELSS, Infrastructure bonds etc. are exempt from taxes. Short term investments are generally subject to income tax, so you should be prudent about the tenure of your investments. The final point on taxes is that, you should always resist the temptation of understating your total income to save on taxes. Ethics aside, the risk of ignominy and potential penalties, is simply not worth it.
Invest for your child's education: College and professional education is getting more expensive every year. In your forties, your children’s college education is only a few years away. If you want to support your children’s college education, you need to start investing towards that objective. There are child plans offered by insurance companies, designed to meet the educational needs of your children. You may also consider a systematic investment plan, depending upon your time horizon and risk profile. But you should never compromise your retirement planning goals to invest for your children's education. There are scholarships and educational loans that your child can take advantage of, but there are no loans to be availed for your retirement
Live Simply: This is a recurring theme in the articles in this series. Simple lifestyle is the mantra for saving more. A simple lifestyle is also, very often, a healthy lifestyle. Involving your entire family, including children if they are teenagers, in the financial planning and decision making process is a wise approach. With the entire family working together towards your financial plan, not only will it ensure greater success, but more importantly it will get your children interested in personal finance and financial discipline at a very early age.
Calculate and track your net worth on an ongoing basis: Building financial security is a long-term process. Tracking your net worth is how you measure your progress. Celebrating each milestone in your financial plan, along the way is critical to keeping yourself motivated and moving ahead with a sense of purpose. Your net worth is the value of your assets (everything you own) less your liabilities (everything you owe). Awareness is half the battle won. The other half of the battle is the discipline of tracking to a plan to meet your financial objectives.