When we enter our 40s and 50s, we tend to reflect on our lives, accomplishments, and finances. While pursuing our careers, many of us also face responsibilities of caring for growing children, ageing parents and buying and maintaining a house. We need financial stability and a plan for building wealth. Despite the challenges, midlife presents an opportunity to take control of our finances and pave the way for a prosperous future.
The Indian wealth management sector is experiencing a significant growth, fuelled by the country's promising long-term economic prospects, favourable demographics and increasing income levels. Despite having a smaller proportion of affluent individuals compared to developed markets, India has the second-highest number of high-net-worth individuals (HNIs) among BRICS nations.
Projections indicate that India's HNI population is set to expand by an impressive 75 per cent, surging from 3.5 lakhs in 2020 to 6.11 lakhs in 2025. This surge presents an excellent opportunity for individuals to strategize and plan their wealth-building endeavours effectively. Here are some essential steps to consider in our wealth-building journey.
Earn and save wisely
It is important to assess how much money you need for retirement, children’s educations, children’s marriages, buying a home or paying off debt and to then develop a plan to save to meet your goals.
Next, create a detailed budget that encompasses all your income sources and expenses. A popular budgeting approach is the 50/30/20 rule: allocate 50 per cent of your finances to necessities, 30 per cent to discretionary items and 20 per cent towards savings. You can customise this rule to align with your specific goals. The systematic approach simplifies the process of managing your finances.
Take the time to assess your spending habits and identify areas where you can cut back without compromising on your quality of life. Setting clear savings goals for both short-term and long-term needs is essential. Also, establishing an emergency fund is crucial to cover unexpected expenses, and safeguarding your investment funds from being depleted during emergencies. Use automated payment options to make regular transfers to a dedicated savings or investment account, to build your financial security.
Make strategic investments
Investing your hard-earned money is key to creating a consistent increase in income and savings. Investments vary in risk and return, and your risk tolerance should be balanced with your age and financial goals. Before diving into investments, learn about different investment vehicles and their associated risks and returns. Understand the difference between fixed-income investments (such as bonds) and equity investments (such as stocks).
Instead of parking your funds in low-interest temporary savings accounts, explore diversified investment plans, such as debt (Provident Fund, Bonds), equity (Stocks, Mutual Funds) and life insurance to safeguard your wealth while capitalising on growth opportunities and reducing risk. Diversification can also enhance potential returns when some assets outperform others.
For midlife investors, a balanced approach to risk is crucial. While taking some risks is necessary to generate returns, you should avoid overly risky investments that could jeopardise your financial security.
Safeguard your future
Insurance plays a vital role in protecting your accumulated wealth. Apart from life insurance, consider health insurance, disability insurance and long-term care insurance to mitigate the financial impact of unforeseen events or health issues. A global survey found that the percentage of women (22 per cent) without life insurance is twice that of men (11 per cent). Life insurance ensures that your loved ones are financially protected and can maintain their standard of living if something unfortunate were to happen to you.
Periodically review and update your insurance coverage as your financial situation evolves, ensuring it adequately aligns with your needs.
Create passive income streams
Building passive income streams, such as real estate properties, dividend-paying stocks or peer-to-peer lending platforms can provide financial stability and support your wealth-building efforts. These avenues allow you to generate additional wealth without requiring constant active involvement. However, be prepared for some initial effort and due diligence to select the right investment avenues.
Leverage company benefits
Take full advantage of the benefits offered by your employer, such as National Pension Scheme (NPS), matching retirement contributions (Employees Provident Fund) and expense reimbursements. The NPS currently has a mere 46.4 lakh voluntary subscribers, reaching only about 10 per cent of the total investing population in India. These perks not only help you save on income tax but also contribute to your long-term retirement goals.
Seek professional advice
Consult with a financial professional to gain insights into various investment options, risk factors and personalised wealth-building strategies.
Gaining a clear understanding of your risk appetite is essential when making well-informed investment decisions that align with your financial objectives. A qualified financial advisor can provide personalised guidance based on your specific financial situation, goals, and risk tolerance. They can help you design a comprehensive wealth-building strategy tailored to your needs.
Be transparent about your financial goals and concerns with the advisor and seek a second opinion if you feel unsure about any investment decisions.
Build wealth consistently
Once you have a solid plan, follow it diligently. Opt for the right investment instruments that suit your risk profile, and with time, you will witness the fruits of your financial efforts. Building wealth is not a one-time event; it requires consistent effort, discipline, and regular reviews of your financial plan.
As you progress through midlife, your priorities and circumstances may change. Regularly revisit your financial goals and make necessary adjustments to your investment strategy. Building wealth in your midlife may seem challenging, but it is possible to build wealth by employing careful planning, decision-making and disciplined habits. With tailored strategies for midlife circumstances, individuals can overcome obstacles and create a stable financial future.
Sachin Somwanshi, Head of Finance, MassMutual India
