They say life begins at 40. This is because by the age of 40, you should be settled into your long term career, instead of just working at your job. You should also ideally have enough financial security to take care of your family’s goals and also pamper your loved ones and yourself every so often.

But this isn’t something that just happens automatically.
There are steps you must take to ensure that your 40s are everything that you need and want them to be – financially.

Let’s see what these steps are:
 

1. If you don’t already have a PPF account, open one
   
   The PPF is the Government’s way of contributing to your retirement.
   It’s tax deductible when you invest (the first ‘exempt’), interest earned is tax free (the second ‘exempt’), and your maturity value is tax free as well (the third ‘exempt’). Hence earning it the coveted E-E-E tag, or Exempt - Exempt - Exempt.
   With a 15 year maturity, extendable indefinitely by 5 years at a time, and with market linked, tax free rates of interest, the PPF is a solid, long term retirement oriented investment avenue, and you should put it in place as soon as possible.
   Note: the limit was earlier Rs. 70,000 per annum, which as on 01st December has been hiked to Rs. 1 lakh per annum, which is the full allowable exemption limit under Section 80(C).
   
   While you’re at it, check your employer’s EPF plan, and make sure you match it. In the Financial Plans that we have built at PFN, a regular feature is the EPF corpus – it always helps the client achieve his or her retirement goal, if the amount is significant enough. To make your amount significant, ensure that you contribute atleast 12% of your Basic salary.
    
2. Top Up Your Contingency Fund – Every Year
   
   The logic behind having an emergency fund is this: if you lose your job, or for whatever reason are unable to work all of a sudden, or suddenly have a medical emergency on your hands (your own or your parents’, spouse or child’s) that may or may not be covered by insurance, your life shouldn’t come to a grinding halt on the financial side.
   
   You should have enough money in the bank (for immediate access) and in liquid funds to meet the emergency related expenses and also to help your life continue on its normal course until you can get back to work.
   
   As you get older, the likelihood of this kind of medical emergency happening goes up.
   You don’t want to find yourself in a situation where you suddenly need Rs. 10 lakhs for an unexpected surgery, need to take 2 months off work for recovery, and are strapped for cash.
   
   The last thing you want to worry about at that time is ‘My SIPs are all going to stop due to insufficient funds’, or ‘The cheque is going to bounce because my salary is going to be affected’.
   
   This is the kind of thing that happens to people who don’t plan ahead, and you don’t want to be in that situation.
   
   You need to have a contingency fund in place that is the equivalent of at least 6 months of regular cash outflows. At PFN, we recommend a contingency fund of anywhere between 6 to 24 months of cash outflows. Here’s a brief example:
    

   Household Expenses:	Rs. 50,000
   Home Loan EMI:	Rs. 30,000
   Car Loan EMI:	Rs. 14,000
   Monthly investments:	Rs. 16,000
   Total Cash Outflow p.m.:	Rs. 1,10,000
   Contingency Fund Required:	Rs. 6,60,000 for 6 months
   Plus: Medical Contingency Fund:	Rs. 5,00,000 (this figure is a suggestion, not a rule) <
   Total Contingency Fund:	Rs. 11,60,000

   
   
   Next year, due to inflation, your expenses will be higher to maintain the same lifestyle. Your contingency fund should match this level. Top it up every year by at least 7-8%, preferably 10%.
    
3. Get a Handle On Your Debt
   
   Some debt is good, some is bad. The good debt helps grow your wealth by enabling you to buy appreciating assets, such as a home. The bad debt helps you buy depreciating assets, like your car, or simply doesn’t help you buy any assets at all – like credit card debt.
   
   If you have a credit card and use it freely, make sure you don’t run up credit card debt. The rate of interest is so incredibly high (up to 40% per year) that you may as well throw your money away. If you have a home loan that you are repaying, consider whether it is better to prepay your home loan or not. (See our article titled Home Loan Dilemma – To Prepay Or Not To Prepay)
   
   Whatever you do, don’t stretch yourself too far out of your comfort zone.
   Banks can be notorious for mis-selling loans.
   Predatory lending is what happens when your bank RM tells you that you can afford a higher loan i.e. a higher loan EMI, when really, you can’t. You as a customer are happy about getting the higher loan i.e. buying the bigger house, so you take the loan, and find yourself struggling under huge EMIs / a longer loan tenure, when interest rates go up.
   
   This is not something you can afford to mess up on in your 30s and 40s because at this time most of your life goals are kicking in as well. Your kids have school fees, college fees, university fees, your lifestyle is going up so regular monthly expenses increase, and you’d like to start taking holidays to get away from the grind, so there’s those expenses too. Make very sure that you don’t saddle yourself with a heavy home loan, and let all your other goals suffer.
   
   And remember, loan EMIs are regular cash outflows and your contingency fund should take them into account.
    
4. Do You Have Enough Insurance?
   
   The way insurance companies decide on their premiums is very simple.
   In the case of life insurance, people in their 40s are much more likely to suffer heart attacks, strokes and other such medical conditions than people in their 30s. Similarly, people in their early 30s are typically safer than people in their late 30s. It’s all about age.
   It’s the same with medical insurance, with your personal health history and pre-existing diseases and maybe a medical test thrown in (although most companies will not ask somebody in their 30s for a medical examination).
   
   The bottom line is, the earlier you take insurance, the cheaper it will be to maintain. Remember, you’re paying these premiums every year. Start young, pay less, and renew it on time, every time. The math is undeniably sensible, as long as you have the right term insurance and mediclaim policy.
   
   You should ideally also have Personal Accident insurance and Critical Illness cover. All of this is in addition to any insurance provided for you by your employer, if any.
   
   To know how much life insurance you need, check out our Human Life Value Calculator.
    
5. Know Your Magic Number
   
   Everybody has one. It’s the number that will set you financially free. Enough money such that you are able to live out the rest of your life with your loved ones in a manner to which you are accustomed. To put it simply, it’s the amount that you need to retire.
   
   A sure-fire way of achieving, or coming close to achieving this number is to save and invest as much as you can right now, so you can spend once you retire. Your Retirement Corpus is what will enable you to live your golden years without worry.
   
   If you’re in your mid 30s, living a life that costs you roughly Rs. 25,000 per month, and spend Rs. 4 lakhs a year on annual medical and travel and other discretionary expenditure, and you want to retire at the age of 60, can you guess how much you will need to live your life until the age of 85?
   
   You’ll need upwards of Rs. 20 crore.
   
   This is assuming that household inflation is 8% p.a., medical travel and other inflation is 10% p.a., and you invest your retirement corpus in safe fixed income instruments earning you 6% post tax p.a. If you already have built a corpus of Rs. 10 lakhs, and invest it into equity mutual funds earning 15% per annum until your retirement, then the corpus you require goes down to about Rs. 17 crore.
   
   It seems huge, but to achieve this figure you need to invest about Rs. 53,000 per month into diversified equity mutual funds giving you a return of 15% per annum, every month, until you retire. The math is easy and you can use our Retirement Calculator to see what your own magic number is.
   
   So, know your number and start working towards it. By the time you are in your mid 40s, you should be well on your way to achieving this figure.
    

Conclusion

Somebody once said ‘It’s easy when you know how’. This person was right. But first, know what you need to do. Then find out how and do it. Start with these 5 steps and the sense of control over your financial life will amaze you.

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Comments
rambabuk.indianbankwms@gmail.com Dec 24, 2011 Really most useful and must follow thing for youngsters
udaykiran.mudigonda@gmail.com Jan 02, 2012 good summarization of all the ingredients needed for better financial life.

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