Life Cycle ~ Wealth Cycle & Financial Planning

Life Cycle ,Wealth Cycle ,Financial Planning, Wealth Management, Investments, Insurance, Accumulation Phase, Distribution Phase,
Many people take no care of their money till they come nearly to the end of it, and others do just the same with their time.  – Johann Wolfgang von Goethe
Financial planning, thus,  is not exclusively about retirement planning or investing or even portfolio management. If distilled to its purest elements, this discipline is more accurately understood as one that involves applying guiding principles to deal with the past, present and future finances. 
Financial planning is the process of meeting your life goals through the proper management of your finances.
It is useful to have a perspective on the life cycle and wealth cycle which you are in before going in for investing for a secure financial future. Understanding Life Cycle and Wealth Cycle is one way to become a informed investor.
These are the normal life cycle stages that people go through, viz.:
During this stage, focus is on education in most cases. Children are dependents, rather than earning members. Pocket money, cash gifts and scholarships are potential sources of income during this phase. Parents and seniors need to groom children to imbibe the virtues of savings, balance and prudence. Values imbibed during this phase set the foundation of their life in future.
Young Unmarried
The earning years start here. A few get on to high-paying salaries early in their career. Others toil their way upwards. Either way, the person needs to get into the habit of saving. The fortunate few who start off well have to avoid falling into the trap of unsustainable life styles.
Equity SIPs and Whole-life insurance plans are great ways to force the young unmarried into the habit of regular savings, rather than lavish the money away.
This is the right age to start investing in equity. Personal plans on marriage, transportation and residence determine the liquidity needs. People for whom marriage is on the anvil, and those who wish to buy a car / two-wheeler or house may prefer to invest more in relatively liquid investment avenues. Others have the luxury of not having to provide much for liquidity needs. Accordingly, the size of the equity portfolio is determined.
Young Married
A cushion of assets created during the early earning years can be a huge confidence booster while taking up the responsibilities associated with marriage.
Where both spouses have decent jobs, life can be financially comfortable. They can plan where to stay in / buy a house, based on job imperatives, life style aspirations and personal comfort. Insurance is required, but not so critical.
Where only one spouse is working, life insurance to provide for contingencies associated with the earning spouse are absolutely critical. In case the earning spouse is not so well placed, ability to pay insurance premia can be an issue, competing with other basic needs of food, clothing and shelter. Term insurance (where premium is lower) possibilities have to be seriously explored and locked into.
Depending on the medical coverage provided by the employer/s, health insurance policy cover too should be planned. Even where the employer provides medical coverage, it would be useful to start a low value health insurance policy, to provide for situations when an earning member may quit a job and take up another after a break. Further, starting a health insurance policy earlier and not having to make a claim against it for a few years, is the best antidote to the possibility of insurance companies rejecting future insurance claims / coverage on account of what they call “pre- existing illness”.
While buying an insurance policy, there has to be clarity on whether it is a cashless policy i.e. a policy where the insurance company directly pays for any hospitalization expenses. In other policies, the policy-holder has to bear the expense first and then claim re-imbursement from the insurer. This increases the liquidity provisions that need to be made for contingencies.
All family members need to know what is covered and what is not covered in the policy, any approved or black listed health services provider, and the documentation and processes that need to be followed to recover money from the insurer. Many insurance companies have outsourced the claim settlement process. In such cases, the outsourced service provider, and not the insurer, would be the touch point for processing claims.
Married with Young Children
Insurance needs – both life and health – increase with every child. The financial planner is well placed to advise on a level of insurance cover, and mix of policies that would help the family maintain their life style in the event of any contingency.
Expenses for education right from pre-school to normal schooling to higher education is growing much faster than regular inflation. Adequate investments are required to cover this.
Married with Older Children
The costs associated with helping the children settle i.e. cost of housing, marriage etc are shooting up. If investments in growth assets like shares and real estate, are started early in life, and maintained, it would help ensure that the children enjoy the same life style, when they set up their independent families.
By this stage, the children should have started earning and contributing to the family expenses. Further, any loans taken for purchase of house or car, or education of children should have been extinguished. The family ought to plan for their retirement – what kind of lifestyle to lead, and how those regular expenses will be met.
At this stage, the family should have adequate corpus, the interest on which should help meet regular expenses. The need to dip into capital should come up only for contingencies – not to meet regular expenses.
The availability of any pension income and its coverage (only for the pensioner or extension to family in the event of death of pensioner) will determine the corpus requirement.
Besides the corpus of debt assets to cover regular expenses, there should also be some growth assets like shares, to protect the family from inflation during the retirement years. 

Wealth Cycle is an alternate view to look at a person’s profile. The stages in the Wealth Cycle are: 
This is the stage when the investor gets to build his wealth. It covers the earning years of the investor i.e. the phases of the life cycle from Young Unmarried to Pre-Retirement.
Transition is a phase when financial goals are in the horizon. E.g. house to be purchased, children’s higher education / marriage approaching etc. Given the impending requirement of funds, investors tend to increase the proportion of their portfolio in liquid assets viz. money in bank, liquid schemes etc.
Inter-Generational Transfer
During this phase, the investor starts thinking about orderly transfer of wealth to the next generation, in the event of death. The financial planner can help the investor understand various inheritance and tax issues, and help in preparing Will and validating various documents and structures related to assets and liabilities of the investor.
It is never too early to plan for all this. Given the consequences of stress faced by most investors, it should ideally not be postponed beyond the age of 50. 

Reaping / Distribution
This is the stage when the investor needs regular money. It is the parallel of retirement phase in the Life Cycle.
Sudden Wealth
Winning lotteries, unexpected inheritance of wealth, unusually high capital gains earned – all these are occasions of sudden wealth, that need to be celebrated. However, given the human nature of frittering away such sudden wealth, the financial planner can channelize the wealth into investments, for the long term benefit of the investor’s family.
In such situations, it is advisable to initially block the money by investing in a liquid scheme. An STP from the liquid schemes into equity schemes will help the long term wealth creation process, if advisable, considering the unique situation of the investor.
Given the change of context, and likely enhancement of life style expectations, a review of the comprehensive financial plan is also advisable in such situations.
Understanding of both life cycle and wealth cycle is helpful. However, one must keep in mind that each investor may have different needs and unique situations; the recommendations may be different for different investors even within the same life cycle or wealth cycle stages.  (~source NISM)

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