Question

3) Explain your reasons on how the following financial products (with examples) accommodate to the financial life cycle in each of the stages seen in class:

a) insurance products

b) investment accounts

c) loan products

d) retirement plans

Answer 1

First Stage : income stage

When person first begin earning an income, budgeting is the critical financial skill. Develop a suitable budget and build the discipline to live within your income so that you don’t fall into a debt trap. Once person learn to live to available income, start building savings into your budget. The emergency fund will have the first claim on your savings and this is an urgent and important task.

Unless person have dependents on his income, life insurance is optional at this stage, however, a basic health insurance is important. Other insurance products like vehicle insurance and personal accident insurance can also be included as required.

State Two : The dependent stage

This is the most demanding stage where person will have dependents on his income, therefore life insurance is a critical element for security. Person should go for term insurance which gives required protection at the most efficient cost. Person should also consider to expand health insurance to cover family too.

Income and expenses would have both expanded and person should be better at budgeting and saving by this stage. Person should Invest the savings to construct a portfolio that is aligned to growth, income or liquidity needs of goals. Person should also initiate planning for retirement and put some fund in retirement.

Debt management is a critical function in this stage since needs are likely to be more than availability of funds. Considering ability to repay one should add debt and ensure credit score or credit history is not harmed. Borrow primarily for appreciating assets where it will help grow your net worth over time

Stage Three : Growth Stage

This is the stage where income would be high while expenses would have stabilised resulting in growing savings.

This is the most critical stage where the available funds needs to be invested appropriately and not wasted in lifestyle.

Person should increase their funding to retirement funds. They should also make investments as per their goal and should look for balanced investments now.

Health insurance & life insurance cover needs to be appropriately evaluated and should be increased substantially. The debt which had been taken earlier, needs to be planned for repayment.

Stage Four : Retirement

There wont be any active income during this stage hence the object should be to control expenses to stay within the available income. Managing the investments to generate income and protect the corpus from inflation becomes the primary investment activity at this stage.

Adequate health insurance is critical since health costs can significantly wipe of your retirement corpus. Life insurance only relevant if it is required to protect retirement income for the spouse. Debt should not be a big part of finances at this juncture