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How the Life Cycle Hypothesis Can Help You Reach Your Financial Goal?

  10/16/18 3:50 AM

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Life Cycle Hypothesis is when you plan your consumption and savings behavior in the best possible manner over your entire lifetime. This theory explains why people incur high amounts of debt in their early years of earning an income despite lacking a strong financial backup. They do so because they anticipate a higher income at a later stage. This works very well for some people, but not for all.

The fact is this: Saving is extremely important for the well-being of an individual and the economy as a whole. The Financial Savings Ratio for 2011 was as high as 10.9% of the Gross Domestic Product. However, loads of people who “save” reasonable amounts of money in their early years fail to build a retirement corpus. This is because of their unplanned financial behavior.

In order to save in a planned and systematic manner, one needs to “invest” money rather than simply save; this ensures that the tremendous increase in inflation does not consume your savings. The inflation in India is close to 10-12% p.a. while your savings account will only pay 4% interest, you will actually end up losing close to 8% of your wealth if you stack it in your bank account. The same amount can be invested intelligently in a plan that will provide you with higher returns.

A planned investment is the key to a sound financial future.

1) Consider your future goals

2) Take into account your expenses and liabilities

3) Consider your risk appetite

4) Check the horizon for Investment

5) And most importantly, stick to the investment plan till you reach maturity

It may sound difficult but it is not so difficult in reality. After all, we are talking about the most interesting thing in your life MONEY! The charm itself makes the path seem simpler.

The Basic Tips to keep in mind while making an Investment

  1. Chalk out a Goal Sheet: It may sound silly, but actually making a note of your long term financial objectives like your child’s higher education, etc. can prepare you to become disciplined enough to continue such investments over the long term.
  2. Make a Proper Plan: The most important step for planned investment is conducting a cash flow analysis or preparing a financial plan. Try to stick to your plan as much as possible without deviation so that the long term objectives of your investment are fulfilled.
  3. Review the Plan once a year: It is necessary to review your plan once a year. Avoid reviewing the plan every day or every week as it will not serve any purpose. This is because the investment horizon of any investment tool is determined by the objective, and hence, should only be reviewed after a certain period has elapsed.
  4. Build a Contingency Fund: Set some funds aside for medical exigencies and other emergencies so that investments intended for long term investment is not hindered due to cash crunch. Avoid touching this investment under any circumstance and plan effectively by taking emergencies into account

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