At 40 you are nearly at the mid-point of your career, with important milestones coming up both from professional and family perspectives. On one hand, you are by now well grounded (e.g. settled in a location of your choice having bought a house or planning for one, school going children, a broadly set lifestyle) and on the other, this is the perfect time to start your journey to fulfil the other important goals of your life (e.g. children’s higher education & marriage, retirement, inheritance).
Here are the 5 financial planning priorities that should be your focus:
1. Build an emergency fund:
With fixed expenses such as EMIs for home loans, cost of children education etc. it is prudent to maintain a contingency fund that can support ~6 months of household expenses to deal with any sudden unfavourable event in your life (e.g. change of career, loss of life or health, medical emergency of parents). The objective of contingency fund is to provide you with financial stability in face of an unexpected challenge so that your focus is on managing the challenge rather than worrying about immediate household sustenance. It is optimum to invest this contingency corpus in liquid funds where you enjoy immediate access when required and high interest rates otherwise compared to savings bank deposits. Consider making this your top priority if you don’t already have an emergency fund.
2. Reduce debt burden and strive towards being debt free:
Review your debt profile and specially mark out any high cost debt that you have except for home loan (for instance, credit card arrears, personal loan, etc.). If something major is outstanding, make it a priority to fully pay it back asap even if that means cutting back on your lifestyle for some time as the high interest charged on these loans can rapidly eat into your saving corpus. Once you have paid off these debts, you can focus on paying off your home loan or other longer term loans. Home loans due to their size may seem formidable at first to pay off, but through careful planning of your cash flows and taxation, you can pre-pay some amount of your loan (e.g. from your annual bonus) regularly. Such practices will help you pay off your entire home loan much earlier than the original schedule and help you save what you would have instead paid to the bank as interest.
3. Ensure that you have adequate life insurance and family health cover:
Take a check that you have adequate life insurance – ideally your life should be insured to ~10 times you annual salary – so that in the unfortunate event of your demise, your loved ones do not suffer financially. In case you find yourself to be underinsured, consider taking pure term life insurance plans as soon as possible – the longer you wait to get insurance the higher the premiums. Similarly check that you have comprehensive health insurance for your entire family – with the growing treatment costs in India it may make sense to take a seemingly higher cover to accommodate for price inflation few years in future. Also consider buying riders for critical illnesses and personal accident as extra safeguards.
4. Plan for your child’s education and marriage:
College education has become expensive over the last 10 years with costs expected to continue increasing going forward. Unless your children choose to get educated in a government college chances are the college fee you will need to pay will be significant and hence the need for planning and investing for it from as soon as possible.
Similarly, marriages in India are costly affairs with parents aspiring to make it a memorable event for their kids and the entire family. Financially this makes marriage cost a significant amount of money and hence a milestone that deserves careful planning and long term savings to build the required corpus as per personal aspirations.
5. Plan for Retirement:
By this time having settled into a regular life, many of us are able to formulate what we want out retired lives to be like. This is the right time to clearly define that vision and get a sense of how much you will need to be able to live that lifestyle. Unfortunately in India retirement planning is often not done till very late in life as we keep ourselves busy trying to achieve our short term goals. With the rising cost of living from housing to health to recreation, continued lack of retirement planning could mean settling for a compromised retired life. Hence it is imperative that once in your 40s you start investing for retirement, even if you make a small beginning (~10% of your monthly income) and increase gradually.
The 40s is the new prime of life in India. With relatively high and stable income, this is the golden period for prudent financial planning impacting all corners of one’s life from planning for emergencies to children’s education to retirement planning. With greater wisdom in aspirations, experience and discipline, this is the right time to focus on the 5 financial priorities for an enriching and peaceful life.
The Author, Manish Hemrajani, COO, Co Founder, FinAskus.