How does financial planning change with age?

When you are just getting started with your investment journey, there's one common bit of advice that you'll often hear from everybody - "Create a financial plan."

Well, they're certainly right, because a financial plan is undoubtedly essential if you want to achieve your life goals. However, did you know that financial planning is not a one-time affair? Contrary to popular belief, a financial plan needs to be constantly updated as you move from one life stage to the next.

Since life goals change with age, it makes sense that your financial plan must also be modified as needed. However, many people overlook the importance of age-based financial planning and fail to factor in their changing financial needs.

The end result can be quite costly, because an outdated financial plan can keep you from meeting your life goals as needed. To avoid this costly mistake, it's best to start by understanding how financial planning changes with age.

Let's take a closer look at this.

In your 20s, you're just getting started with your career. While time is on your side, your earnings will likely be on the lower end of the spectrum. Many of you in this age group may be new earners.

Spending habits in your 20s

At this stage, since you're just getting started with meeting your own expenses, your spending habits may not be fully established yet. Because of this, it may be easy to overspend. And many young people spend before saving - a mistake that could have costly consequences later in life.

Generally speaking, your essential expenses in your 20s will likely consist of the following items.

• Repayment of student loans
• Food expenses
• Utility bills

Things to consider in your financial plan in your 20s

Your financial planning begins in your 20s. What you do at this life stage determines your financial security as you grow older. So, it's important to understand investing and personal finance at this age, before you draw up your plan.

Also, since you are young and have time on your side, you have the luxury to take on a higher level of investment risk. The upside to this is the potential for higher returns.

Here's what a typical financial plan in your 20s may look like.

• Greater exposure to equity and other high-risk-high-reward investments
• Creation of an emergency fund worth six months' income, at the very least
• Term life insurance and medical insurance to secure your family's financial future

With promotions and hikes coming in, your 30s may be your prime earning years. Your financial position in this age group is generally more comfortable, and you're still a long way off from retirement.

Spending habits in your 30s

In your 30s, you may be married and perhaps even have children. As your family grows, so will your expenses. Your bank balance may be more strained now than it was in your 20s. Your list of life goals also grows longer. New goals like home ownership and saving up for your child's future come into the picture.

To meet those new goals, you may end up taking a loan or two. So, your typical expense sheet in this life stage may include these items:

• Your home loan EMIs
• Your personal loan EMIs
• Your family’s daily expenses

Things to consider in your financial plan in your 30s

Your financial plan in this stage should adapt to your new requirements. Since you will likely be financially stable at this point, you can put pedal to the metal and focus more on investing for your future.

Here's what a typical financial plan in your 30s may look like.

• Taking calculated risks with your investments to meet your major life goals
• Diversifying your investment portfolio across asset classes and investment horizons
• Life insurance like endowment plans and/or ULIPs to enhance your savings and/or investments

In the context of financial planning, your 40s will mostly be like your 30s. Your income may still continue to grow, and you may be in line for a few more promotions and hikes. However, the one key difference is that you are closer to your retirement phase now, compared to the previous life stage.

Spending habits in your 40s

In this phase, your parents may have retired, and they may be dependent on you either partially or completely. Your children may have also grown by a decade, and their education expenses would have increased correspondingly. At this point, some common expenses you may have include:

• EMIs for the loans you had availed in your 30s
• Increased education expenses
• Medical expenses for yourself or your parents

Things to consider in your financial plan in your 40s

In your 40s, you may become more conservative in your approach to taking on investment risks. And your financial plan needs to reflect the change in your risk appetite.

Here's what a typical financial plan in your 40s may look like.

• A subtle shift to safer investment options
• Aligning your investment portfolio to meet life goals, if any
• Focus on settling any outstanding debts

By this time, you are just a decade away from retirement. So, your focus will naturally shift to your golden years. And if you had planned your finances well from your 20s, you will be financially secure by this time. However, time may not be on your side, since your earning years may quickly be coming to an end.

Spending habits in your 50s

Your spending habits may be more definite and predictable by this point. You will perhaps know how to manage your money better. Your children could also just be starting out on their careers around this time.

So, your expenses at this point may consist of the following items:

• Any pending debt repayments
• Daily expenses for yourself and your family
• Additional medical costs, if any

Things to consider in your financial plan in your 50s

Between the ages of 50 and 59, your financial plan needs to be updated to reflect your fast-approaching retirement. By now, your asset allocation will need to reflect your dipping risk appetite. It is also important to secure another source of income or two, which can easily replace your regular income after retirement.

Here's what a typical financial plan in your 50s may look like.

• Divesting high-risk investments and reinvesting in safer options
• A significant shift to fixed income investments that offer additional income
• Retirement plans that give you immediate or deferred annuity income

If your financial planning in the previous decades was right, your 60s can be the most enjoyable phase of your life. By this point, you will have retired. So, you can spend time checking off the personal goals that you didn't have time for earlier.

Spending habits in your 60s

In your 60s, much like your 20s, most of your expenses will be for yourself or your spouse. You may not have any major financial costs like EMIs or debt repayments. So, you can make use of your post-retirement income to do the things you always wanted.

Your expenses in your 60s may consist of the following items:

• Daily expenses for yourself and your family
• Discretionary expenses to meet your post-retirement goals
• Medical costs

Things to consider in your financial plan in your 60s

Your financial plan may not need much of an update at this juncture. With most of your life goals fulfilled, you have the freedom to use your post-retirement income as you please. However, you may want to make a few changes to ensure that you leave behind an inheritance, if you wish to.

Here's what a typical financial plan in your 60s may include.

• Maintaining debt-oriented asset allocation
• Capital preservation in order to leave an inheritance
• Means to ensure that the additional income streams remain in place

As you've seen from the phases discussed above, your financial plan needs to change as you age. That way, you can use your income in the most optimal way. The one thing that may remain constant across age groups is taxation. That's why it is important to always include some tax-saving investments in your portfolio. Otherwise, your taxes could reduce your net returns significantly.

With these points in mind, make sure that you draw up a reasonable yet adaptable financial plan as early in life as possible. That will ensure that you are financially secure across all of life's many stages.