Understand Your Financial Clock and Wealth Cycle

Health and Wealth have a lot of things in common. To reap benefits from any of these you must take care of them. Our body has a biological clock which generally repeats every 24 hours. We also have different life stages from our birth till end.  Similarly, we have a financial clock which keeps repeating, and we go through a Wealth Cycle which is closely aligned to our life cycle.

Identify Your Financial Clock

The biological clock is easy to identify. Most of us work during the day and rest at night.  Few must work at night.  Over time the body gets adjusted to the routine and sets a biological clock. Staying aligned to the natural clock helps in maintaining good health. We all have our individual earning cycle. Most of us are salaried, and receive our pay once every month. In some cases, there would be weekly payments. Self-employed professionals have varying cash flows, but can assess their average incomes over a given period. During these small recurring cycles we earn, spend, and save. Identifying this cycle is important so that we can fairly estimate our earnings, expenditure, and savings.

The Life Cycle and Wealth Cycle

The biological life cycle is simplest to understand. From infancy, childhood to adulthood and then old age; the body experiences significant changes. If we take good care of our health and physical well being since the beginning, then there is likelihood of lesser health related problems towards the mid and later stages.

In our initial years we are dependent on our parents/guardians for all our expenses. We start earning when our initial education is complete and start taking care of expenses on our own. In a normal life cycle, we marry, have children, and retire at some stage.  All through these stages there is a distinct and changing pattern of income and expenses. Every event triggers a set of financial responsibilities which we need to plan for. Both life and wealth tend to stabilize over time as we continue gaining experience. It is important to exercise control on both of these to avoid getting overwhelmed with challenges at any stage.

Financial Habits

Good daily routine helps us stay healthy. But absence of ailment should not be treated as good health. We should also exercise daily to stay fit. Similarly, there are some financial habits which if sustained for every earning cycle, will help us stay financially sound during the entire life. Most important of these is regular saving and investing. A defined proportion of our recurring income should always be earmarked for savings/investment. This portion can be 20% in the beginning and you must strive to progressively increase it to 50%. Just as habits tend to change with age, the financial habits also need moderation. This can be done by redefining the asset mix. The proportion of Debt can progressively increase with age. As we move towards Vanaprastha (Retirement) and then Sannyasa (Renunciation), we must also plan for the distribution of accumulated wealth.

Financial Planning

Some people love to live life without any planning, but the challenges might be less if we move in a planned manner. Our parents look after our initial stages of life till we gradually take charge. As the wealth cycle is closely aligned with our life cycle, the financial planning should be given due attention from the beginning. Just as health disorders identified in later stages cannot be rectified by exercising for few days, the financial mismanagement also cannot be set in order easily in later stages. You must closely synchronize your financial habits with the overall Financial plan. Every life event triggers the need to re-evaluate the Financial Plan and make necessary changes.

Recommendations

1. Identify your financial clock, and develop sound financial habits to build a strong and predictable wealth cycle.

2. Plan to save/invest a minimum of 20% in every earnings cycle from beginning, and progressively increase it to 50%.

3. Prepare a Financial Plan as early as possible, and align your savings and investments to make it successful. Re-evaluate your Financial Plan with every important life event.

5.  Keep reviewing your Asset Mix and make appropriate changes as per the Life Cycle.