Navigating major life events: Financial planning for every stage of life
13th November, 2023
We're all on our own personal journey through life and finance plays a big part in it. Below are some life events that can significantly impact your financial situation and actions you can take to stay on top of the finance side of life.
Getting that first job and building your career
Everyday is a school day, but at some point, the day of formal education typically ends and life in the real world begins. You cherish that first paycheck and become accustomed to that regular income. Below are some things which should be focused on:
Emergency savings - it's recommended to have at least six months' expenditure in a rainy-day fund to cater for those unexpected necessary expenses.
Being aware of lifestyle creep - as you build your career and earnings it's tempting to buy that bigger car and join the more expensive gyms. However, before you know it, you're struggling to keep up with the Joneses. You should set realistic budgets early in your career and review as you progress.
Setting goals and saving for the future - joining a pension scheme and making regular savings from your earnings is important. There is a balance to be struck between saving for short-term goals versus longer-term goals.
Income protection and critical illness cover - there are policies which protect you in the event you are sick and unable to work. These may pay you a percentage of your income until you are able to return to work or a lump sum payment if you become ill to specific illnesses. Your employment may cover these, but it is worth checking what benefits you are entitled to. Same applies if you are self employed.
Money isn't the most romantic of topics. However, when marriage is likely to be the biggest financial contract you'll enter in your life, the financial side warrants attention.
- Individual and/or joint accounts - A 50/50 split on costs might be fair, but a proportional split on costs depending on the earnings split may be more equitable. This ensures both spouses can budget for their own short-term and longer-term goals like retirement, as well as shared goals.
- Sharing financial responsibilities - Managing the household finances will feel less burdensome if both partners have been knowledgeable and engaged in finances from early on.
- Life assurance and income protection - Taking out a life assurance policy might end up being the most caring thing you've ever done for your significant other. Also, if something does happen to one partner, ensuring there is a rainy-day fund in place, held in joint names, means there is access to cash until affairs can be sorted.
- Being knowledgeable about tax positions and marital status - it is worth ensuring you are assessed for tax reasons according to your preferences. Also, co-habitants are not treated the same as married couples in the eyes of tax law. This can be particularly problematic in the event of death and inheritance tax, or when it comes to gifts.
Becoming a parent
Children add a huge amount of joy to a parent's life. But there are significant costs in rearing a child which need to be budgeted for. Childcare and education fees tend to rise faster than general inflation and costs associated with schoolbooks, uniforms, and extra-curricular activities add up. Thinking ahead and saving annually for these via a fund earmarked for education can help cushion the costs when multiple children are in school or college at the same time. Life assurance and income protection become even more important when children are involved.
Looking ahead to retirement
We all have a responsibility to secure our future income streams for retirement.
- Making pension contributions and availing of tax breaks - your employer may make pension saving easy for you or you may need to do a bit of researching yourself on what pension structure is most appropriate for you.
- Ensuring you know what your pension is invested in - investing is one thing, but educating yourself so you are confident in your investment strategy is also important. And checking in on this strategy and performance periodically is important too. Competence breeds confidence in investing.
- Know your retirement options - you will need to assess the spending level your pension can afford while being sustainable. There are also some choices to be made as to how you prefer to manage your retirement funds and drawdown from them. For others, buying an annuity type product to have a guaranteed income is their preference.
Planning for the next generations
Securing your lifetime income allows the flexibility to gift to the next generation. Gifting strategies should be discussed with an adviser and form part of your financial plan. There is a small gift exemption of €3,000 per annum which can be used to gift to any individual each year. The benefit of using the small gift exemption in this way menas that the tax-free thresholds are not eroded. If the beneficiary is a minor, they will be able to access and control the funds from age 18. Other ways to gift and/or reduce potential taxes also exist which should be discussed with your adviser.
Like life plans, your financial plan might not always work out the way you thought. But it's important to have a plan in place that can be reviewed as you move through life which can be tweaked as your circumstances change. Change is inevitable but a plan can give you comfort along life's journey.
WARNING: The information in this insight is not a recommendation or investment research. It does not purport to be financial advice and does not take into account the investment objectives, knowledge and experience or financial situation of any particular person. There is no guarantee that by putting a financial or investment plan in place, you will meet your objectives. Investors should determine whether an investment is appropriate to their own personal circumstances. Davy manages discretionary portfolios in accordance with agreed investment mandates.
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