A financial plan that worked for you at 25 may look very different at 35, 45 or 65. Life changes, and with it, so do the demands on your money.
If you’re getting married, this will mean planning for two instead of one, whereas having children brings new expenses and responsibilities. A new job could leave you with more money to save, while divorce, an inheritance or retirement can force you to make financial decisions at an already emotional time.
It’s important for your financial plan to move with these changes. That doesn’t mean starting over every few years, but it does mean checking that the plan you have still makes sense for the life you’re living now.
Below are six life changing moments when that check-in becomes particularly important:
- Getting married or entering a long-term partnership: When you get married, financial planning shifts from focusing on individual goals to agreeing on shared priorities as a couple. This often requires compromise to ensure that both partners’ needs and objectives are appropriately balanced. Open and honest communication about money is essential. Couples should seek common ground on their spending, saving and investment habits, as unresolved financial differences can place significant strain on a relationship.
- Having children: When children enter the picture, several financial priorities need to be considered. These include saving for their education, ensuring the family has adequate medical cover, increasing emergency savings to provide for an additional dependant, and reviewing life and disability cover. The need for life cover may be limited when nobody depends on you financially. Once you have children, however, you need to consider how they would be supported if you were to pass away or lose your ability to earn an income. While new parents often do not have sufficient investments to cover these risks yet, life and disability cover can therefore play an important role in protecting the family’s financial security.
- Going through a divorce or separation: Divorce or separation requires you to reassess your financial needs, goals and overall position. This means that your housing and other living expenses may increase considerably when one household becomes two. You may need to revise your budget, consider maintenance obligations and reassess your longer-term financial objectives. At this stage, it is also particularly important to update your will and beneficiary nominations.
- Receiving an inheritance: When deciding what to do with the money received, apply the same sound financial principles that you would when receiving a work-related bonus. Prioritise repaying high-cost debt, avoid spending the entire amount on short-term wants and allocate an appropriate portion towards long-term investments that support your future financial wellbeing. Depending on the value of the inheritance, it may also be an appropriate time to review your will and broader estate-planning arrangements. It is also good practice to consult your financial adviser whenever you receive a significant financial windfall as they can help you evaluate your options and make responsible financial decisions.
- Changing jobs. If you move to a higher-paying role, avoid allowing lifestyle inflation to absorb the additional income. Increase your savings and investments at least in line with the increase in your earnings. Wherever possible, preserve your retirement savings when changing employers and resist the temptation to cash them in. Retirement savings are intended to support your long-term financial objectives and accessing them prematurely can have a material effect on your ability to achieve those goals.
- Entering retirement. Retirement brings several financial risks, but two of the most important are longevity and inflation risks. Longevity risk is the possibility of outliving your retirement savings. Inflation risk refers to the possibility that rising living costs outpace the growth of those savings, gradually reducing your purchasing power. For retirees, the effect of inflation may be even greater than the headline inflation rate suggests, particularly once increasing healthcare costs are considered.
Regardless of your life stage, certain core financial principles should remain consistent. Live within your means and maintain a realistic budget, save and invest regularly, and manage financial risks appropriately. Even without a major life event, I recommend reviewing your financial plan at least once a year as a great deal can change over 12 months.
Ultimately, a resilient and adaptable financial plan is a balanced one. It should support your long-term objectives while providing enough flexibility to accommodate major life transitions and unexpected events, without compromising your overall financial stability and security. An emergency fund is a good example of this balance, allowing you to deal with an unexpected expense without having to withdraw from long-term investments and potentially compromise your future financial goals.
Written by Haydn Johns, Head of PSG Life and PSG Invest at PSG Wealth