The key to financial planning is to understand the different life stages that an individual will go through. Now, this will obviously depend on the background, gender and several other attributes. It is difficult to make a generic model that will fit all here. For the purpose of simplicity and learning we can make a good approximation.
Let us assume an individual X who is born in a middle class or upper middle class household in any of the Indian cities. By and large, X will be completing his school and graduation till the age of 21/22 and maybe his post graduation till the age of 24 or so. As we are talking of financial planning, which requires income, we will start looking at the financial life of X after he starts earning at 24, presumably in a job, though it could be from other means as well.
Here is how the model of X’s financial life can mirror his real life:-
- Age 24 through 27/28 can be called the Eligible bachelor stage. X has limited responsibilities financially, is looking to spend money in acquiring some indulgences, has reasonable income but low savings/investment.
- Age 27/28 through 35 can be called the Settling down stage. X probably gets married and has 1/2 children in this period. His income rises but so do his expenses. The spouse may have to break from work due to kids, possibility of high loans to acquire assets.
- Age 35 to 45 can be called as School going years ( for children not X ). Incomes continue to peak and expenses continue to rise. This is the best period to invest in equity for future goals.
- Age 45 to 50 can be called as College going years ( again for children ). The characteristics are the same as before but outflows are much higher and X may now look at other avenues apart from his regular job.
- Age 50 to 60 can be called Early financial independence. This is the time when X can theoretically not bother about regular expenses as financial independence has arrived. Note that this may or may not equate to early retirement, which is a different issue altogether.
- Age 60 to 70 can be called Stage 1 of sunset where X will still lead an active life and therefore have fairly high expenses.
- Age 70 to 80 can be called Stage 2 of sunset where activities diminish and so does the need for expenses.
I am stopping here as anything above 80 will really be a bonus for most of us !! Actually, I am not even sure whether we should try to live beyond that. Anyway, while X may want to live the life in a different manner, I think the model described above will largely fit many of the readers of this blog.
The goal of this blog is to see how most people can follow the above model and put money strategies in place so that they are financially independent by the time they are 50. Having done this myself, I definitely know that this is eminently possible.
Before we talk about the different money strategies at different points in life, two more things need to be done. We must have an idea of the dynamics of spending and also an understanding of what constitutes real financial independence.
I will cover these in my next two posts. Keep reading and give me feedback so that I can fine tune the blog.