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| Capitalstars Investment Advisor |
Around the half-way point in one’s working life, it is not uncommon to feel a sense of panic—over time gone by and financial goals not met. If you are one of those, who are facing a mid-life financial crisis, then here are six ways to get out of it.
After working for 18 years as an IT professional, one would have expected Pankaj Kalra, 48, to have a sizeable nest egg kept away. Instead, Delhi-based Kalra has barely Rs 3.5 lakh in savings, that too accumulated over the past 2-3 years. He lost Rs 10 lakh in a failed business venture and another Rs 12 lakh went in meeting household expenses when he was not working. While the thumb rule states say he should have had four times his annual income in savings by now, Kalra has barely 20%. “Right in the middle of my life, I realized I had no concrete plans and had not put aside any savings,” Kalra recounts.
Life, they say, begins at 40. But like Kalra, there are many who lose their footing in their middle years—perhaps the most remunerative period in one’s working life. At a time when one should be getting financially stronger, some sleepwalk into a money tangle after years of overspending, bingeing on debt or indulging in exotic investments.
Others get waylaid by circumstances, such as a prolonged illness, loss of job or partner, business setback or even a matrimonial tangle. Irrespective of the ordeal, getting finances back on track in one’s 40s or early 50s can be tricky with limited working years ahead. If you don’t start securing your financial future soon, you will find that much time is already lost. You need to kick-start the savings cycle afresh to get back on the path towards financial independence.
In this feature, we outline some remedies for those mid-lifers who are stuck in a financial quagmire. We also suggest some pointers to help others avoid landing in a soup in the first place.
The genesis of a financial crisis
Financial planners say most mid-life financial crises are precipitated by procrastination or lack of aggressive savings. Too often, individuals put off investments for later years. “The seeds of mid-life financial strife are usually sown in the early years,” observes Amol Joshi, Founder, PlanRupee Investment Services. In the initial years, there is a belief that enough time is at hand to think of long-term goals like retirement.
What can lead to a mid-life financial crisis?
Eventually realizing that there was a huge gap between what he expected to earn and what he was actually earning. This forced him to start his own venture, which turned belly up within a few years. “When starting out, there is a tendency to overestimate earnings potential and underestimate expenses,” points out Prableen Bajpai, Founder, and Managing Partner, Finfix Research & Analytics.
Delay in savings makes it harder to reach the goal
Putting off investing for later can be harmful. At times, income growth may not materialise to the extent you expect. At the same time, inflation would be at work to pull down the worth of your savings every year. The choice of investments also determines what shape your finances take.
Overdependence on conservative, tax-inefficient investment avenues like bank fixed deposits will not allow your savings to survive inflation. Investors who take some exposure to equity from an early age are usually better off. Expensive indulgences like real estate in the early years also has a harmful effect. Apart from being illiquid, investment in property—for other than own use—is sub-optimal, given the poor rental yields. “Ultimately, your investments should be able to beat inflation on post-tax basis. Otherwise, your savings are losing purchasing power,” argues Joshi.
Start small, but hike outgo later to reach the target
The mid-life crisis may also be precipitated by having no direction for your savings. If you don’t have a defined purpose for your savings, it is vulnerable to being swallowed up. The tendency to club investments into one pool is another reason investors panic when goals come due.
Most individuals lump all savings into a single basket. All accumulated investments are usually treated as one big money pot from which to withdraw as and when the need arises. This opens up the risk of overdrawing funds for the nearest goal, leaving much less for goals to come. But if every rupee has a defined purpose, it allows you to be disciplined in withdrawals. Having a system in place also prevents you from reacting adversely to changes in market conditions. Says Rustagi, “When investments are linked to goals, it makes you focused. One is mentally prepared to deal with volatility so that abrupt decisions based on prevailing market conditions can be controlled.”