Life Cycle and Wealth Cycle In Financial Planning

By Moneysuresh7 - Jun 28 2012

While planning on a compreheni!e financial plan" it i #etter to ha!e a perpecti!e on
the Life Cycle and Wealth Cycle of the in!etor$
Life Cycle: Childhood
Fe% normal tage that people go through" i&' Childhood' In thi tage" the focu i
mainly on education$ Children are dependent on their parent$ (he ource of income i
poc)et money" cah gift and cholarhip during thi phae$ Parent need to ma)e
children to im#i#e the !irtue of a!ing" #alance and prudence$ (he core !alue im#i#ed
during thi phae et the foundation of their life in future$
Young Unmarried
(he earning at thi tage tart from their career through their alarie$ (he peron at thi
tage need to ha!e the ha#it of a!ing or to tart off a!ing they ha!e to a!oid falling into
the trap of unutaina#le life tyle$
*any inurance plan and +IP are good %ay to ma)e the young unmarried into the
ha#it of regular a!ing" rather than la!ih the money %ay$ (hey plan on marriage"
#uine" tranportation and reidence determine the li,uidity need$ (hi i the perfect
time to in!et in e,uity$ People %ho %ih to ha!e a car" houe may prefer to in!et more
in relati!ely li,ud in!etment a!enue$
Young Married
- huge reponi#ility fall at thi tage$ When #oth poue ha!e decent .o# and high
paid alarie" life can #e financially comforta#le$ (he planning of #uying a home" a car
#aed on .o# imperati!e$
Inurance i re,uired and earning poue need to maintain in paying policy premium$
+ay" if earning poue i not %ell placed" paying premium i an iue" competing %ith
other #aic need of food" clothing and helter$ (erm inurance i #et to opt for$
It i #etter to go for a lo% !alue health inurance policy" %hen your employer pro!ide
medical co!erage$ (hi %ill help the employee to tac)le the ituation %hen an earning
mem#er ,uit the .o# and ta)e a #rea)$
Married with Young Children
/0pene on education from prechool to higher education i gro%ing fater than regular
inflation$
Inurance need i good #oth life and health for e!ery child$ *any mi0ed policie and
inurance co!er %ould help the family maintain their life tyle in the e!ent of any
contingency$
Married with Older Children
(he cot aociated on children ettle i$e cot of houing" marriage etc may hoot up$ If
your earlier in!etment %ere in hare" mutual fund and real-etate" it %ould enure
your children for the ame lifetyle" %hen they et up their independent familie$
Pre-Retirement
-t thi tage" the gro%n children hould ha!e tarted earning and contri#ute for family
e0pene$ Further" the loan ta)en on car" or education of children hould ha!e #een
e0tinguihed$ (he family ha to plan for the regular e0pene %hich %ill #e met in future$
Retirement
(he family hould ha!e more ade,uate money to meet the regular e0pene$ (he e0iting
penion policy %ill determine the corpu re,uirement$ 1ther than thi" they hould ha!e
gro%th aet li)e hare" to protect the family from inflation during the retirement year$
Life Cycle and Wealth Cycle +tage
2 (he life cycle tage of an in!etor can #e claified a follo% '
o Childhood tage
o 3oung unmarried tage
o 3oung married %ith children tage
o *arried %ith older children tage
o Pre-retirement tage
o 4etirement tage
2 (he income le!el of in!etor" the a!ing potential" the time hori&on and the ri)
appetite of the in!etor depend on hi life cycle$
2 3ounger in!etor ha!e higher income and a!ing potential" ta)e longer term !ie%
and may #e %illing to ta)e ri)$
2 1lder in!etor may ha!e limited income and a!ing" horter time hori&on" and
un%illing to ri) their a!ing$
2 (here are 5 %ealth cycle tage for in!etor '
o -ccumulation tage i %hen in!etor are earning and ha!e limited need for
in!etment income$ (hey focu on a!ing and accumulating %ealth for the long
term$ /,uity in!etment are preferred in thi tage$
o (ranition tage i %hen financial goal are approaching$ In!etor till earn income"
#ut ha!e alo dra% on their earning$ In!etor chooe #alanced portfolio that ha!e #oth
de#t and e,uity$
o 4eaping tage or ditri#ution tage in %hen in!etor need the income from their
in!etment" and cannot a!e further$ (hey reap the #enefit of their a!ing$ (hey prefer
de#t in!etment and preer!ing of capital at thi tage$
2 Inter generational fund tranfer refer to tranfer of %ealth to an in!etor$ (he
preferred in!etment a!enue %ill depend on the life cycle and %ealth cycle tage of the
#eneficiarie$
2 +udden %ealth urge refer to %inning in game and lotterie$ In!etor hould #e
ad!ied to temporarily par) their fund in money mar)et in!etment and create a long
term plan after thin)ing through the plan$
2 -ffluent in!etor are of t%o type '
Wealth preer!ing in!etor %ho are ri) a!ere and li)e to in!et in de#t$
Wealth creating in!etor %ho prefer gro%th and are %illing to ta)e the
ri) of e,uity in!etment$
Wealth Cycle #aed categoriation of in!etor financial need" refer to uing a
generalied approach to a!ing and in!etment a the #ai of claification" rather than
age or life tage$
(he follo%ing ta#le illutrate the ame
Sr!o +tage "inancial !eeds #n$estment Preferences
1$ -ccumlation +tage In!eting for long
term
identifiedfinancial
goal
6ro%th option 7 long term
product$ 8igh ri) appetite
2 (ranition +tage 9ear (erm need for
fund a pre-
pecified need dra%
cloer
Li,uid 7 medium term
in!etment$ Lo%er ri) appetite
5$ 4eaping +tage 8igher li,uidity
re,uirement
Li,uid and mediu term
in!etment $Preference for
incmoe and de#t product
: Inter- 6enerational
tranfer
Long term
in!etment of
inheritance
Lo% li,uidity need$ -#illity to
ta)e ri) 7 in!et for long term$
; +udden Wealth +urge *edium to long term Wealth Preer!ation$ Preference
for lo% ri) product$