We are all unique individuals with different backgrounds. What we do have in common is that we need to make sure that our finances are in order.
In different life stages, we will have different priorities. Here is a guide on the financial knowledge you will need as you journey through the different stages of your life.
Teenagers (below 20 years)
Teenagers should begin learning financial knowledge and self-responsibility. It is good for them to have a regular allowance to learn to manage their own budget.
Personal finance basics that teens can pick up are:
- Create a simple budget and manage daily spending.
- Save regularly to a high yield junior saving fund.
- Set goals for saving and buying “wants” (parents can match children’s’ savings to help).
- Learn skills and entrepreneurship to gain life experience and additional income.
- Understand medical insurance protection to reduce medical expense burden on parents.
Young adults (20s)
A young adult is an independent person. They should take on responsibilities including managing their own finances.
It is important for a young adult to practice good financial habits and to take advantage of the power of compound interest.
The key areas a young adult must get a good grip on personal finances are:
- Conduct a regular six month personal finance review to obtain, budget, save, invest and spend monetary resources. This should take into account various financial risks and future life events to achieve financial freedom.
- Ensure monthly cash flow is positive and cash is liquid, with regular savings and no overly high debts.
- Keep a minimum of three months savings as emergency expenses.
- Save/invest at least RM1, 000 monthly (RM12, 000 annually) towards building future wealth and passive income.
You will want to have a financial freedom plan, investment goals and craft your personal investment plan to achieve your financial goals.
- Risk planning to cover income replacement in case of disability or critical illness, and debt cancellation in case of death or loss of income.
- Basic estate planning with a simple will to ensure your assets go to your desired beneficiaries if you pass away.
Adulthood (30s to 40s)
Couples are increasingly having children later in life to make sure they can adequately provide for their children in today’s modern society.
Children are a high priority for most parents while juggling the need for a comfortable life and building a retirement nest egg.
For singles or parents without children, the years of accumulation are just as important and may include other significant life events like a change of career.
Here are the key focus areas for serious wealth building and personal finance planning as an adult:
- Track your net worth growth year on year with a healthy growth goal of +20% net worth per annum through saving and investing.
- Lifestyle, family and other expenses will continue to increase. You will want to ensure your cash flow remains positive and that you set aside at least RM1, 000 monthly to invest and build your wealth.
- Diversify your investment portfolio so that you are not severely impacted if a particular investment is not performing.
- Calculate how much EPF savings you will have by retirement, and how much you need to invest and achieve to fund your retirement.
- Ensure you have six months’ expenses as liquid emergency savings to cope with unexpected happenings.
- Plan ahead for your children’s education and the expected costs while factoring in inflation (a ballpark figure is RM500, 000 for overseas tertiary education).
- Your children will require insurance coverage especially for medical and critical illness.
- Depending on your assets, have a will written out or trust fund set up. Make sure your EPF, insurance, and investment nominations are in place.
- If your children are minors, you need to specify a guardian in the event you pass away.
- Store all your financial documents in a secure location accessible by those you trust in case anything untoward happens to you.
Retirees (60s and above)
You will want to have your retirement plan drawn up, with monthly/annual withdrawals scheduled. You need to manage your financial assets and track your retirement funds to make sure you are on track.
Check the following and make necessary changes:
- Track your retirement funds and review your withdrawals at least annually.
- Live a lifestyle that comfortably matches your retirement plan. Avoid the temptation to overspend and blow your retirement fund. You need to make sure that your funds are sufficient for the next two to three decades.
- Increase your liquid funds to three years’ worth of expenses to make sure you have sufficient cash even if market conditions affect your investment portfolio.
- Review your risk planning needs and focus on healthcare and legacy planning.
- Estate planning needs to be in place, fully updated, and communicated. You may want to consider giving some gifts earlier instead of waiting until your passing.
- Communicate with your children or caretakers on your wishes for healthcare, financial and funeral directives.
- Make full use of your time post-retirement to stay active and continue pursuing your passions while making a difference in the lives of all those around you.