Financial Needs – The Key to Investing Wisely to Secure Your Financial Future
Take some time to think WHY you are investing. As you have many financial needs, there are many reasons why you invest. Your financial needs change as you progress in life. The next section discusses the phases or stages that we go through in our lifetime and the financial needs that is accompanied in each phase.
Phases of Life
In order to accurately answer the question of why you are investing, you need to understand the phases of life. There are basically three main phases of life. These are the Formative or Development Years, the Productive Years and the Golden Years or Retirement Years. There will be different financial needs in each of the phase.
The Formative and Development Years
This phase begins from the time you were born to the time you start your career. This phase involves babies, toddlers, children, teenagers and young adults. It is in this phase that you learn new things. You go to a school and get a wholesome structured education. I say wholesome because you not only learn what is taught in the classroom but also from extra-curricular activities and sports.
Through the ECAs and sports, you are exposed to a variety of areas such as music, arts, sports and much more. The ECAs and sports teaches character building such as discipline, respect, trust, team work, responsibility, resourcefulness, leadership, time management and so on. Everyone is talented. Everyone has strengths and weaknesses. It is at this phase where you learn what your talents are, what your strengths are and what your weaknesses are. That is why you must take part in as many ECAs and sports as you can. Explore as much as possible.
In this phase, normally, people have very little money but a lot of time and energy. The main investment that you do at this stage is for your personal development. You should learn and explore as many things as possible. Make good use of the time and energy that you have. Channel it to good and positive activities. You will be well rewarded with a lifetime of goodness. The things you do and learn in this phase prepares you for the next phase which is the productive years.
In this phase, you start to work and build a career. You start to earn your own income. The financial obligations will begin as you are independent and cannot ask your family for financial support anymore. For some, one of the first major financial obligations that have to be fulfilled is the repayment of student loan. Then you have to get a car to move around. You need to get a place to live.
The early part of this phase is focused on being self-reliant and career building. At this stage, invest in yourself and your career. Get a mentor or a guru in your profession who can help you progress quickly. Mentors or gurus are people who have already walked the path that you are going to embark on soon. They can help you to learn immensely from their experience to advance yourself.
The first major investment that you need to do at this stage is to get insurance for yourself. You have to be responsible for yourself and getting insured will ensure that you will be financially secured should an unforeseen scenario takes place. You won’t have to burden your family or your parents with your financial needs.
Some parents work and earn all their lives for their family and for their children without planning for their own retirement. They may not have earned sufficient income that they could have set aside in savings for themselves. The circumstances may not have been conducive for saving for their retirement. You may wish to invest in an annuity or insurance for your parents. That way, they are guaranteed a monthly sum that they will receive for the rest of their lives. The insurance will help to defray the medical cost if the need arises.
Then you begin to save as you progress. You might be in a relationship and might be planning to settle down. The next big investment that you need to do is to get a permanent place to live and start a family. You need to get an apartment or a house depending on the location and city where you live and work in.
A few years go by and you have children of your own. Apart from the daily expenses, medical, a holiday and so on, you need to plan for their future and for your retirement as well, although it may be years from now. You might want to get an education fund for your children. Now that the family has grown bigger you might have to move to a bigger place. And don’t forget you have to setup your own retirement fund.
As you can see, the productive years are when you make the biggest financial investments. It is also at this age when you have big financial obligations and you make big financial decisions for your life. It is at this phase where you should really perform financial planning. The investments that you make now should be with a strategic mind set so that it will go a long way to helping you financially, years ahead from now. The investments should be in a manner that brings the biggest possible financial gain. This strategic idea is the basis for the Strategic Investment Matrix.
The Golden Years
The golden years is when you retire from your job and enjoy the fruits of your labor. That is the way it should be. You can have a wonderful life in your golden years if you have been disciplined financially and have invested wisely for the long term. In this stage of your life, your income should come completely from your investments.
The last thing you want to do at this stage is to worry about finances. The expenses at this stage will primarily be for the daily expenses as well as medical. Medical costs at old age can wreck the financial situation of families. Your children may have to support you financially if you do not have enough insurance or medical cover. This will have an adverse impact on their finances and on their lives. Their own financial plan may be affected negatively.
In some cases, it might not have been possible to have enough retirement funds. In that case, it is understandable that the children provide the support. But if you do a proper financial planning right at beginning of your career, it would definitely result in a huge positive difference in your life.
I’m sure that you have relatives or neighbors or friends who are enjoying their golden years and are financially independent. Talk to them. Ask them what was their financial planning like. There is a lot to learn from their experience. Most of these old folks have either invested in their own career and were really successful at it, have invested in real estate such as ranch, farm land or a second house, or they have invested in their own business.
You have seen how the financial needs change over time. You have seen the various forms of financial needs as you progress in life. Like or not it is clear that we have to do all these investments for ourselves as well as our family. Sometimes, we take these things for granted. But only when we sit down and start to study the financial needs in detail, will we realize areas of neglect.
The major reasons for investing to meet financial needs are listed as below. This is based on the financial needs of the three phases of life.
Income is the money that we earn by working, through a business venture or through investments. This is the money that comes in that we then use for our daily expenses and to pay for our lifestyle. The income can be active income or passive income.
Active income is where our input is needed either to perform the work ourselves or to provide a service. Our job, career and our business falls in the active income category.
Passive income is where we earn money without having to do any of the work. Dividend from invested stock, returns from a business investment, capital appreciation of gold and silver and returns from an insurance policy are examples of passive income. Passive income is derived primarily through invested capital.
Insurance is a form of financial protection for oneself and for the family. Should an unforeseen event such as an accident or mishap or a critical disease is diagnosed, the insurance will help to pay for the medical costs. The insurance should also provide a compensation for the loss of life or in case of total permanent disability.
Gold is another form of financial protection. The fiat currency system that we are using today is overloaded with debt. It is a currency system that has been stretched to its limits. The fiat currency is losing its value and that is evident in the high inflation rates. This currency system is in real risk of collapsing or at a major devaluation. In such a currency crisis, gold and precious metals will reign again. Gold and precious metals provide a financial protection against the collapse of the fiat currency system as well as a hedge against any hyperinflation.
Financial safety is to cover for any misfortune such as job loss or a medical situation that is not covered by insurance. It is generally advised to have cash savings that can cover your expenses and your family’s expenses of at least six months. The idea is that should a job loss situation arise, the six months would be enough to tide you and your family over while you look for another job.
Personally, I think that six is too short as there are people out there without jobs for years. I would say that savings of at least two years’ worth of expenses is more an appropriate level.
Home is the place you and your family live. There are a lot of people who rent their homes. This is a financial bleed as the money spent on rent is money lost. If you calculate the amount of rent that you have to pay over a long time like 30 or 40 years, you will realize that it can come up to a huge sum. It is always better to get your own place. You save on the rent as well as you have an asset that you can monetize later if need to. Like they say, money saved is money earned.
As the children grow up, their own financial needs will also rise, especially when they go to college or university. It is very important to start your children’s’ fund as early as possible. The earlier you start the fund, the better the money invested in the fund will work for you through the compounding effect. Education fund can be established with a normal savings account with the bank or through an insurance company which comes with extra coverage. The insurance coverage can help to defray any medical cost that is incurred on behalf of your children.
Retirement fund is for yourself and your spouse. The retirement fund will help you in your golden years. It is advisable that your income transitions from active income to passive income as you age. Once you hit the retirement age, the passive income will completely form your income. Retirement fund can be in many forms. It can be an annuity that pays a monthly allowance, it can be a portfolio of dividend stocks that pays regular dividends, it can be a real estate that pays regular rent, and it can be a passive partnership in a business investment or a combination of the above. It is advisable that the income comes from multiple income streams so as to have risk diversification.
This is essentially being free financially. Financial Freedom or Financial Independence is an interesting position to be in and is something that a lot of people dream about but very few achieve. It is absolutely possible though and it depends on your financial discipline, your financial obligations, how early you start to save and invest wisely, and how much you invest.
There are people who become free financially at a young age, which is much earlier than their retirement age. But they just continue to work if they like what they are doing or just to stay active and busy.
There could other reasons why people invest apart from those financial needs described above.
Ask yourself at which phase are you in and why are you investing. What are the financial needs that you are fulfilling?
My Financial Needs – Strategic Investment Matrix
Write down your financial needs and reasons clearly. This exercise would form the foundation to your investment decision. Your investment decision should be catered to your individual financial needs and objectives. That is the right approach and this is one of the important first steps to achieving a fruitful investment experience.
This article is part of the series on Strategic Investment Matrix. You are encouraged to read the rest of the articles in this series as it is a great source of information on financial planning.