Tuesday, August 10, 2010

Managing money at every stage of life

AS day follows night and is little under our control, so do our lives move through the years.

On this journey, our physical, social and family needs continue to evolve as the years go by.

We're the children of our parents.

We're the parents of our children.

Sometimes, we may become the support system of our parents.

And finally, our children often become the support system for us, especially for most Malaysians.

Accompanying each and every stage and change in life, we face different challenges of money management.

Whether you're young and single, newly married, or starting a family, find out your financial needs and objectives are, as well as the financial risks and mistakes you need to avoid at every stage.

Young and single

The young and single group includes those who have not married or teamed up with a partner.

They are typically:
  • From ages 18 to late 20s
  • Developing a first or maybe, a second career
  • Still staying with parents or are renting or owning a house
  • Beginning to invest money
Their financial needs and objectives include:
  • Establishing a lifestyle
  • Establishing a career
  • Controlling credit card and other debts
  • Supporting themselves and perhaps their family
  • Buying a car
  • Buying a home
The financial risks and mistakes to avoid at this stage of life may include:
  • Spending too much of your income in establishing a lifestyle
  • Incurring too much consumer (credit card) debt
  • Failing to start building the habit of saving and investing
  • Failing to establish financial goals and objectives
  • Thinking that you can postpone saving for the future until you earn more
  • Not investing in assets that offer reasonably high capital growth
  • Investing too much money in high-risk assets such as options and futures, or speculating in the stock market
  • Failing to get insurance coverage against the risk of disability and medical expenses
The key to money management at this stage of life is to set financial goals and use your money wisely.

Since you're just starting to earn an income, your spending profile can seriously affect your savings and investing habit for the rest of your life.

But since most earn a relatively fixed income, we should be able to plan our living expenses reasonably.

The key money management strategy here is to adopt a relatively conservative lifestyle that is within your means.

Start building your wealth as early as possible.

Newly married couples

This group is those who recently got married.

They are typically:
  • From ages mid-20s to mid-30s
  • Melding the lives of two different people
  • Bringing two extended families together
  • Joining finances
  • Merging the financial objectives and investment styles of two people
  • May rent or own a house
Their financial needs and objectives include:
  • Establishing a lifestyle as a couple
  • Seeking promotion and status in their career
  • Saving and investing for retirement of two people
  • Supporting the family
  • Buying a home
  • Furnishing a home
The financial risks and mistakes to avoid at this stage of life may include:
  • Not able to establish joint financial goals
  • Spending too much money for the wedding and new family lifestyle
  • Incurring too much consumer (credit card) debt
  • Failing to save and invest your income
  • Failing to consider each spouse's financial objectives, investment style and risk tolerance
  • Thinking you can postpone saving for the future until you earn more ? Not investing in assets that offer reasonably high capital growth
  • Investing too much money in high-risk assets such as options and futures, or speculating in the stock market
The challenge of money management at this stage is to establish a financial plan together as a couple and compound the synergy effectively.

This stage of financial life is typically characterised by two people with different upbringing and value systems joining together. Developing a financial plan together may not necessary mean that you should merge all of your assets into one plan.

The key is to have a master plan that takes into account the holistic view of the family and still allows for two different investment styles and risk tolerance.

For some couples, financial matters can be a sensitive topic.

If this is the case for you, consider getting a financial coach to act as facilitator.

Married with children

This group includes married couples with one or more children.

They are typically:
  • From ages late-20s to late-30s
  • Transitioning from a family of two to a family of three or more
  • Facing changing lifestyle and spending patterns due to the children
  • Considering whether one spouse will leave the workforce to take care of the children
Their financial needs and objectives include:
  • Establishing a lifestyle as a couple with children
  • Advancing in career or setting up own business
  • Financing expenses of their newborn and growing children
  • Saving and investing for tertiary education of their children
  • Supporting a now larger family
  • Buying a larger home for their expanding family
  • Furnishing a new home

The financial risks and mistakes to avoid at this stage of life may include:
  • Not planning and saving for increased expenses relating to your children
  • Spending too much money on your newborn and growing children
  • Failing to save and invest for retirement due to too much focus on planning your children's tertiary education
  • Not having sufficient insurance coverage in line with the increased responsibilities
  • Not investing in assets that offer reasonably high capital growth
  • Not making a will or appointing a guardian and trustee for your children
The key focus at this stage is to take your children into money management consideration.

There's often an adjustment period due to the increased responsibilities and family commitments.

Despite the importance of your children, you must not neglect saving and investing for old age.

By Yap Ming Hui

The writer is managing director of Whitman Independent Advisors Sdn Bhd and author of five best-selling personal finance books.

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