Wealth management

19 January 2023

Saving and investing through the stages of life

Savings are the basic building blocks of financial freedom. Without the ability to put away a portion of your income it would be almost impossible to accumulate funds that will relieve you from financial uncertainty and allow you to live the kind of life you wish to live. In this post we will discuss how much one should have saved up at each stage of life to maximise the opportunities for financial freedom.

 

Firstly, we need to understand that one’s lifestyle determines how much one needs to save in order to be financially comfortable. Therefore, it is totally plausible that someone with a larger amount of savings can be considered to be less financially secure than someone with a smaller amount of savings once lifestyle costs are considered. What matters is how many months or years of average expenses your savings can cover, not necessarily how much your savings are in monetary terms. We also need to understand that savings must be invested in a well-diversified portfolio of assets that earns a return which is better than the rate of inflation, otherwise the value of the savings will fall with the increase in living costs year by year. With that in mind, let us start by looking at savings in your 20s.

 

Your overwhelming objective in your 20s is to maximise your earnings capacity and develop positive savings habits. Most people do not earn much in their 20s and therefore it is important that they invest the majority of their savings in improving their education, skills, entrepreneurial ventures and any other activities that will ensure that they can earn much more as they grow older. Nevertheless, saving at least 10% of your income in your 20s can help to develop the positive habit that will become essential as your income increases.

 

In your 30s you should have established yourself in a particular profession or business. This stability will allow you to focus on rising within the ranks or improving your business profitability. This will require some further investments in personal development but you should also note that unemployment or business collapse is still possible at this stage. Such a collapse could be devastating to your personal finances because your responsibilities will be much more than they were in your 20s. It is therefore important that you adopt an aggressive savings stance at this stage. Aim to have about 2 years’ worth of expenses saved and start contributing toward your pension. It could also be very helpful to start a conversation with a financial advisor to help you understand your long term financial needs. Advisors at IC are always ready to help.

 

At age 40 you need to have retirement firmly in sight. With likely financial pressure from dependents it is possible that you could consider retirement to be a secondary issue. However, not properly preparing for retirement could make it even harder for your dependents when you finally do. Your portfolio should ideally cover between 3-5 years’ worth of living expenses at this stage and you should also ensure that your statutory pension contributions are in order.

 

If you have managed to build your business or gradually climb up in your profession, it is likely that your 50s will feature top positions with the most compensation you have had yet. Aim for your accumulated portfolio to fund more than 5 years of living expenses by the time you hit age 60, or better still, cover a significant portion of your annual expenses through the returns it generates. This will ensure that while you can depend on your pension for day to day living expenses, your  portfolio can cater for unplanned situations such as medical bills, helping out dependents or other emergencies.

 

If you want to talk to a professional about putting your savings in a portfolio that will stand the test of time, call IC today on +233 (0) 308250051 and get started on building that nest egg.

 

Thank you for reading.