6 important To Dos in your Mid Career Financial Planning Part 1

When you reach your early 40s, you are approaching the mid-point of your career. You already worked for about twenty years, assuming you began your career in your early 20s and you have about 20 years to reach your retirement age. This stage of your life is very important both from a career and financial planning perspective for the following reasons:-

1. By the time you are in your early 40s, you are likely to be in middle management or senior management role. Your income, therefore, likely to be much higher than the earlier stages of your career. With higher disposable incomes you should be able to save more.


2. This is the stage of your life, when you are more settled both from a career and family lifestyle standpoints. The lifestyle, you have in your forties, is most likely what you want to have for the rest of your life. We aspire for more improvement in our life, but a cutback in lifestyle is usually very difficult for us.


3. While people today have much more mobility in their careers, compared to what people had a generation back, increasing age of the family does impose constraints on mobility. With your family settled and your children in middle or high school, relocating to new city for work, is often seen undesirable. For some people significant investment in property can also cause them to have restricted geographical mobility. Unless you have sufficient career opportunities in your city, restricted mobility can put constraints on career growth. If you have restricted mobility and if you think that there are not ample career opportunities, you need to factor in early retirement in your financial planning.


4. Early 40s is the stage of life, when you start approaching important goals like children’s college education, marriage and your own retirement. If you have been saving for these goals from the start of your career, then you should be comfortable. However, if you have been saving adequately, for a sufficiently long period of time, then this is time when you should get very serious about your long term goals.


5. The forties are the time, when the first warning signs come up on the health radar. Health risks in the 40s in these times are much higher than what it was one or two generations back, due to environment pollution and lifestyle related issues. A serious illness can cause severe financial stress to your family and you must guard your family against health related financial risks.

The above reasons make it imperative that, you check off some important financial planning to-dos when you reach the mid-point of your career in your early 40s. In this post we will discuss 6 important mid-career financial planning to-dos.

Build financial contingency for unexpected risks

No one expects loss of employment at the prime of their career, but in this age uncertainty has become the new normal. While increasing globalization has resulted in more opportunities for us, it also exposes us to be impacted by global risks. Over the 10 years or so, it has been observed that, business cycles are becoming shorter and economic uncertainties increasing. It is easier to deal with uncertainty when you are younger, but dealing with financial uncertainty becomes increasingly difficult with age and responsibilities. When you are younger, you have lesser obligations and more career opportunities. When you are in your forties, career opportunities become limited while the financial obligations towards your family increases.

Prudent financial planning calls for setting up a contingency fund that can meet three to six months of expenses, in the event of an unexpected job loss. The contingency funds should be very liquid, so that you can draw from it as and when you need to meet your daily, weekly or monthly expenses. Most Indians keep their short term funds parked in bank savings accounts, but liquid funds can be better savings options for contingency funds, because they usually give much higher returns than savings bank accounts while providing almost as much liquidity (except on non business days) as provided by your savings bank account. If you have adequate contingency funds, you can use it, to meet your regular expenses without liquidating your long term investments, till the time it takes you to find a suitable opportunity and return to full time employment.

Reduce debt burden and have plan to be debt free in the near term future

Debt comes in many forms but invariably has a cost (interest) associated with it. Often we are not even aware of the magnitude of these costs, but if a significant part of your savings goes towards interest payments, it can be damaging to your financial future. By the time you reach your forties, the only debt that you should have is your home loan. If you have any other kind of debt, like credit card loans, personal loans, automobile loans, etc prioritize and pay them off with a high sense of urgency.

These kinds of debts are mostly related to lifestyle aspirations but the cost of servicing them can have long term implications (please see our post, Cost of debt is huge and can be damaging to your financial future: Part 1). Once you have paid off the short term debt, focus on your long term debt. Home loan is the most common long term debt of middle income households. The cost of home loan is huge and many households are not even aware about the magnitude of the cost. The cost is huge for three reasons. Home loans are multiple times larger compared to other classes of household debts. The tenure of a home loan is multiple times that of a car loan and other classes of household debt. Longer the tenure of a loan, higher is the interest paid over the tenure.

Since the home loan principal is usually a large amount, it is not always possible to repay the principal in a short period of time. But when you reach your early forties, you must try to reduce your interest burden in an accelerated time-frame, otherwise it will surely have long term financial implications as a big part of your monthly savings will go towards EMI payments leaving very little for other important financial goals (please see our post, Cost of debt is huge and can be damaging to our financial future: Part 2). Set yourself a prepayment target every year and prepay your principal at a regular frequency (quarterly, semi-annual or on an annual basis). Over the past year or so, we have seen interest rates softening in India. This is a great time to prepay your principal, so that you can take the dual advantage of lower interest rates and lower loan balance.

Ensure that you have adequate health cover for your entire family

Health is the most important aspect of our lives. As discussed earlier, your family’s health risks are higher when you and your spouse reach your 40s. Also men are more susceptible to some specific health risks in their 40s, while women in 40s are more susceptible to other health related issues. Therefore, you should ensure that, you have comprehensive health insurance cover for your entire family. Further, if you are financially responsible for the healthcare needs of your senior citizen parents, then health insurance becomes even more critical.

If your employer provides health insurance benefit to you and your family, you should review the health plan benefits, including sum insured, co-pay terms and exclusions carefully and evaluate if it provides comprehensive coverage for your entire family’s health needs. If your employer’s health plan is not adequate for your needs, you should take separate health or medical insurance plan for your family. Buying separate Mediclaim for your family also makes sense because if for any reason you have to leave your employer and is not able to find a suitable opportunity immediately; your family will be without health insurance cover for the period, you are between jobs. If, unfortunately, there is a serious illness in the family then it will cause financial stress to your family.

Continued to second part