At this stage of life, a financial mistake can be detrimental to you and your family's future, as you may not have much time to recuperate.
Right from the onset of your career, financial planning should become an integral part of your life. A financial plan that is reviewed and made stronger periodically would help you meet your money needs at every stage of life. However, it is in your 40s when half your professional life is behind you that you reach a critical point where a thorough review of your finances is required. It is the time when your financial responsibilities are usually maximum and you need to plan for your child’s education and marriage, have a home of your own and well on course to build a big retirement corpus. At this stage of life, a financial mistake can be detrimental to you and your family’s future, as you may not have much time to recuperate.
Here are the most important aspects of your financial life that you need to have covered when you are in your 40s:
1. Your child’s higher education: When people reach their 40s, usually their children also gradually start nearing their higher education days. With rising costs of higher education in India, the need to take education loans has also been increasing. When you take an education loan, your child may have to bear its repayment from the beginning of his/her career, which hampers their capacity to make room for their own savings and investments. To avoid this, make timely investment for your child’s higher education. If your child is at least 5 years away from higher education, consider investing in equity mutual funds as these offer highest returns in long term category. Otherwise, invest in balanced funds for a combined exposure to both debt and equity funds.
2. An adequate emergency fund: Emergency fund hedges you in times of financial exigencies such as job loss, severe illness and other unforeseen situations due to which your income stops. Your emergency fund should ideally amount to at least 3-6 months’ expenses. As your age increases, your expenses are bound to increase due to various responsibilities. Therefore, your emergency fund must also proportionately increase with your rising expenses. If you don’t do so, you may have to end up taking an expensive loan or redeem your long term investments at the time of financial emergency.
Keep your emergency funds in savings account as these generally offer interest rates up to 7.25%, along with highest form of liquidity.
3. Insurance against uncertainties: An adequate health and term insurance plan ensures that you and your family are sufficiently covered in case of medical emergencies or your untimely death. When you reach your 40s, make sure you don’t remain under-insured due to insurance policies providing inadequate cover. Your term insurance cover should ideally amount to at least 10-15 times your annual income. Even if you had taken up term insurance in earlier stages of your career, review your policies so that your life cover matches your current annual income. Also, do not remain dependent on your employer’s health policy as that ceases as soon as you leave the company. You can opt for a family floater health insurance and get your children included in it. You can also get a top up medical policy to cover medical costs in case of disability or accidents, as these are cheaper than regular plans involving such services. Additionally, both term and health insurance offer tax benefits under section 80C and 80D, respectively.
4. Corpus for your retirement: As you reach your 40s, you suddenly realize that your retirement isn’t far away. And once you reach retirement, your regular income inflow stops. Therefore, it becomes important to carefully plan for an adequate retirement corpus which would suitably replace your current income and let you lead a peaceful financial life post retirement. Ideally, one should start investing for retirement as soon as they start their professional lives. For people in their 40s who haven’t started their retirement planning would need to make significant investments regularly to build an adequate corpus. While planning for your retirement corpus, make sure you take into consideration inflation. Inflation eats your purchasing power over time, and hence, decide your retirement corpus’ amount after including inflation’s effect. The best way to build an adequate retirement corpus is to invest in equity mutual funds. If you are in your 40s and have at least 15-20 years till retirement, equities will enable you to accumulate a good amount of corpus. Moderate risk takers can opt for balanced funds which reduce the risk arising due to instability of equities for short term.
5. Have a strong portfolio: Many individuals tend to decrease their risk exposure as they reach their 40s and increase investments in instruments involving little or no risk. However, this may lead to insufficient finds for your life goals. Ensure equity has a good portion of your investment portfolio. Despite being a risky investment option, equities have consistently provided highest returns for long term goals such as retirement corpus or child’s marriage. Your financial liquidity and not your age should define your investment ratio in debt and equity. If you have sufficient emergency funds and savings for short term, investing more in equities would generate higher returns as compared to other investment options such as fixed deposits, PPF and NSC.
(By Naveen Kukreja, CEO & Co-founder, Paisabazaar.com)