Meeting Your 4 Financial Needs

Everyone wishes to lead a financially independent life. There are, however, four financial needs, which becomes utmost important to achieve financial freedom. DSIJ explains what those four needs in life are and how to achieve them.



Financial planning has become a buzzword these days. Most of the financial intermediaries worth their salt call themselves financial planners and provide financial planning as a service in their basket of offering. The fact remains that financial planning service offerings are a major tool for them to generate income. But recommendations of products to investors, say for instance mutual fund schemes, are often biased in favor of their associations and this helps them earn higher commissions from their principal fund houses. Needless to say, that although not all financial planning firms follow a biased approach or practice in an unethical way, however there certainly is a conflict of interest in their functioning. Investment is just one part of financial planning. Financial planning is all encompassing and also includes increasing your savings, reducing your unnecessary debt, creating an emergency fund, buying family protection through insurances, and planning all your life goals including your retirement.

All the above services boil down to meeting your four financial needs. If someone is not able to identify and help you service these four financial needs then it's advisable to look for an alternative financial planner. It’s not just about identifying the four core needs but also quantifying them and choosing appropriate products that would help them overcome the fear of not achieving those needs. Further, in this story we would highlight the four most common financial needs and also at the end, would suggest how to achieve them.

Financial life stages

Now most of you may be losing your patience to know those four prime financial planning targets. Bear with me for a while. Before knowing what those targets are, it is important to understand what are the different stages in life and how these needs are associated with them.

Up to 25 years of age



This is the stage when you typically haven't embarked on your journey of earning income and are dependent on your parents. This is the phase where you start learning and discovering what you are good at and then pursuing the same as your career. So, this phase of life becomes really very crucial in terms of your personal as well as career growth. It is a concern for your parents as well as for you, during this stage, that you get the best quality of education which would help you to stand strong in future. So, from a parent, this is the time to create the right foundation for their children. This is possible with the right education.

25 to 40 years of age



This is the phase when you complete your education and start earning on your own, partially attaining financial independence and cutting down your dependency on your parents to fulfill your financial needs. Post the completion of education you probably would be getting your first job. You go on a shopping spree, buy gifts for your dear ones; you probably go on to pick up that Royal Enfield you always aspired to own, and so on. At this stage you do not shoulder family responsibilities. By the age of 30, you are probably married and in a few years you would also have kids. Here you grow from a boy to a man. Now you have responsibilities as well. During this phase, you would be buying your first house and also your first car. So, this phase starts from getting the first job to starting off paying EMIs towards your home and the car.

40 to 60 years of age



By the time you hit this phase of your life, you have typically organised your career to provide a consistent income, you have accumulated savings, your expenses are now stable and predictable, probably you are closer to closing off your debt, etc. So, in this phase, you would be having a good savings ratio as a proportion of your income, unless you dive again into undesirable debt and ruin your portfolio. In this phase, you might want to upgrade your car, buy a better house, and so on. Probably this is the time when you try to fulfill your dream holiday plan and explore new places. Some might move on to start their own venture after having gained the requisite experience by now. This phase seems to be very exciting. Isn’t it? But all this is provided you are sticking to your financial plan and personal finance basics. In this phase you might also consider speeding your savings for retirement.

60 years and above



From hereon, you would probably not be working and earning and falling back on your savings that you'd planned for a comfortable retired life. So, there won’t be any regular occupational income, but you could be earning your pension. Although there might be people, who might continue working in this phase of their life as well. But with age issues, everyone might be required to retire at some point of time, some early while some later.

So it is important that you have planned and managed your savings and assets earlier in life in such a way that you get regular income that support your standard of living while at the same time, your portfolio grows sufficiently enough to beat inflation. In this phase, many would also like to get engaged in philanthropy. Also, it is this phase wherein you should be ready with your final revised will. This doesn’t mean that you shouldn’t have a will before that. In fact, you should have a will way in your 30’s. But in this phase, you should have the final draft of it. Estate planning is something that people ignore and then there are issues, and often, conflicts. So, it is advisable to at least have a written will with probate to avoid any sort of confusion in distributing your assets in your absence.

Four financial needs of life

We have broadly delved upon the different life phases. Now we discuss the four most common realized financial needs and figure out ways to overcome them through prudent financial planning.

Need 1:The need to be able to work till Age 60

There is a common fear among many of us and apprehension among many of us what will happen if due to some untoward event they fail to earn regular and consistent occupational income. This could be due to health disabilities or any other reasons. The disability could be temporary or permanent and it could not be foreseen and planned for. Though in case of temporary disability you can resume your occupation with a gradual recovery over time, but in case of a permanent disability, the result could be starkly adverse on your life as well as your finances. A temporary disability wouldn't impair your life in extreme adversity but you would certainly lose your earning capacity till the time you resume work while this time could be a short duration or at times longer. A proper financial plan should be in place to insure against any such undesirable development.

Need 2: The need to live till Age 60

The second financial need is to secure your dependents financially if one faces an untimely death due to any health condition or an untoward incident. There would be no compensation for the survivors' emotional loss, but a proper planning can at least protect them against limitations posed by financial constraints and enable them to lead a comfortable life.

Need 3: The need to provide right foundation to children

Everyone dreams and works towards providing their children with the right foundation to make them capable of facing any challenges in his life without being dependent on their parents. Often, the right foundation is laid when children get the right education and upbringing with right values. Here, many people fear an inability to provide their children with the right foundation. Say for instance, your child wishes to pursue his/her career in medicine which is quite expensive today and if we consider inflation, then it would be all the more expensive in the future. Have you made any provision for your child’s career? If not, then you might have to go for an education loan. Though an education loan would meet the purpose but could add significant constraint on fulfilling other needs, that we would discuss next. You can achieve this fear with a properly articulated financial plan in place, prepared by a qualified financial planner.

Need 4: The need to have enough corpus at retirement

This is a common need that many people face while planning their finances but is casually and conveniently ignored instead of planning a resolution for such an eventuality. In many developed nations, retirement planning is a specialization in itself among the financial fraternity. There are retirement planners who specifically deal in issues regarding retirement. However, in our country retirement planning is often not given the importance that it rightfully demands. Looking at the aspect of progression in lifestyles it needs focused financial planning to be able to maintain the same lifestyle even after retirement, at the then prevalent price levels. People often have a fear of outliving their retirement corpus and the same is validated and calls for adequate planning. When retired, the running income tax dry up for most people and income in the form of pensions may not be sufficient to maintain your lifestyle. So, the earlier you start your retirement planning; more are the chances that you would need to save less to build your retirement corpus vis-a-vis starting off late.

How to achieve these four financial needs?

While we have discussed the four common financial needs, you might also be curious to know how to achieve them? So, let’s take a look into it.

Solution for need 1 : The first financial need was that “what if I am not able to work until the age of 60?” There are two ways to achieve this need. In case of a temporary or permanent disability, having a disability insurance would come to one's rescue. The disability insurance or personal accident insurance is the one which provides you with a lumpsum agreed assured sum assured if you have temporary disability or total permanent disability. Although, it is important to know while taking up such insurance policies that it should cover maximum eventualities. It is still fine if temporary disability is not covered, but it must cover for permanent disability. The reason for the same is that in case of temporary disability you would be able to resume work when you get back to pink of your health. But in case of permanent disability there is quite a likelihood that it would render you an inability to pursue your occupation any longer. The second way to achieve this is to have well planned investments in mutual funds. This will help you not to rely just on insurance as insurance does have a lot of exclusions. So, it is advisable to have a combination of both personal accident insurance and mutual fund investments.

Solution for need 2 : The second financial need is securing your dependents financially in case of an untimely death before the age of 60. The best way to do is is to have a life insurance policy. Having a life insurance policy would ensure that your dependents are able to continue with their lives without being constrained by financial limitations, in your absence. Here, we recommend a pure term plan. There are two type of life insurance policies, one being pure term and the other being endowment, money back, and ULIPs (Unit-Linked Insurance Plans). It is advisable to have a pure term plan. Does it mean that everyone should have it? No. those who have no dependents or those whose families are not financially dependant on their incomes could opt to avoid subscribing to life insurance. Now, you may ask how much should be the amount assured of my insurance policy? This would depend upon your current expenses, lifestyle and standard of living. Also, any outstanding loans and overall financial goals, etc need to be factored in. It is also advisable to review the same annually to account for any changes in the above factors.

Solution for need 3 : The third need of yours is that “Giving your child right foundation” Education is the way to create the right foundation for your children. It is really important that your children pursue what they desire. To achieve this you need to properly plan for your child’s education. You need to figure out as to what is the kind of career that's of your child’s interest and that he plans to pursue. Then evaluate and understand how much it would cost today and then adjust this amount for inflation. Then you need to set aside amounts twoards a mutual fund SIP and try to determine the returns that the investment could potentially generate over a period of time and such that you are able to achieve your target future expense towards your child's education. You could also make periodic lump-sum investments in mutual funds to build the required corpus for your child’s education. So, mutual funds can be of utility in achieving this need.

Solution for need 4 : The fourth and the final need commonly felt is “How to avoid outliving your retirement corpus?” This is a genuine concern and shouldn't be ignored. To overcome this fear, you need to accordingly plan your finances. It is important that once you've determined your retirement corpus as per your needs, factoring in inflation should not be missed. Life expectancy should be ideally assumed at 100 years to be on the safer side and to not go wrong by saving commensurately for a lesser life expectancy. Investment in mutual funds would help you to achieve your desired corpus at retirement which in-turn would help you to overcome the fear of outliving your retirement corpus.

Conclusion : For a while you can neglect all your wants, however, the needs of the life should be addressed adequately. There are four most important common needs relating to one's finances that could be achieved through prudent financial planning. Achieving these needs should instill relief and mutual fund investments equip you well to settle these fears. To conclude, it is highly recommended to seek help of a qualified financial planner. He can actually help you in a better way to deal with these four financial needs which could be achieved by adequate financial planning and lead you towards financial freedom.