Second stage financial planning

Louise Fairsave,

Added 15 October 2012

louisefairsave

Today we consider in detail how to go about planning for the second stage of financial life – say between 25 to 45 years old. This is a period for young adults to consolidate their independence, a very pivotal transition.   The first stage of financial life, lived right, serves as a foundation for moving on to the next stage. Once the urge to overspend can be curbed and an adequate income can be garnered, reasonable financial success can be obtained, provided there is a clear plan for your finances. If you devote time to consider the future and the different stages of life, you will realize that money is critical to living a financially successful life. The problem is that most people do not take the time to plan; they believe success will come once there is enough money to cover their current costs. Actually, throughout life, you need to be planning and reviewing your finances so commit to setting aside specific time on a regular basis for planning. This second stage of financial planning and goal setting is no different. It involves getting control of debt, building a savings pool and critically looking ahead as you make solid plans for being comfortable in the next stages of financial life. Here, then, are five pointers for successfully passing this stage and moving towards the next: 1. Having started the process of managing your debt during the first stage of financial life, build on this by working towards being able to maintain your household budget on a cash basis from month to month. Get to the point where, when your credit card bill arrives, you are able to pay the balance owing in full. Also, aim to be free of any student loan debt as soon as possible and certainly during this second stage of financial life. 2. Consolidate your saving habit which was established during the first stage. Start by accumulating savings that will cover one month’s household expenses, moving eventually to three months’ expenses. This sum may be invested where it earns a reasonable return yet is easily accessible. For example, it can be invested in Government savings bonds or in a money market account. In addition, saving towards retirement remains a continuing goal. 3. This is the stage where you plan on securing your dependents. For example, you may start to plan your children’s education and set aside funds towards the expected cost. You may also have to contribute to the care and upkeep of aging parents. 4. At this stage, if you haven’t done it before, you may be able to afford a term insurance policy for say, ten times your income. This coverage may seem high; however, the younger you are, the cheaper will be the same level of insurance coverage. This level of coverage look to keep you adequately covered as you progress in your work career. 5. Having moved to the stage where you are building net worth, it is recommended that you start estate planning. You may prepare a last will and testament. At the least, it would be useful to identify a power of attorney should you become incapacitated. These five pointers describe the groundwork needed during this second stage of financial life in order to move comfortably into the next stage. The next set of article will examine the third stage of financial life, between 45 and 60 years old.   • Louise Fairsave is a personal financial management advisor, providing practical counsel on money and estate matters. Her advice is general in nature; readers should seek personal counsel about their specific circumstances.

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