Now that we know the Categorization of our money based on objectives, it is appropriate to discuss what factors would dictate investment in one objective over another and what triggers will influence future allocations (and rebalancing of current allocations).
Age
Age is one of the major factors in determining allocations in a particular portfolio.
Younger investors typically have higher risk appetite, lower income levels and potentially higher number of materially impacting life events (like spending for own marriage, buying a home or car). As they age, their income increases, responsibilities get fulfilled and eventually diminishes to keep the lights on once their bucket lists get ticked. Leisure travel and health takes prominence for most after retirement.
For the purpose of differentiating investing portfolios, we will divide the age groups into 4 categories:
- Infant and juvenile (ages 0 to 21 years): You read it right. There is a significant likelihood that this age group is not reading this. There is a significant likelihood that their parents are reading it. The advice for this age group is for the parents.
- Young Adult (ages 22 to 40 years): The ages where portfolio is very volatile, and lot of care needs to be taken to ensure that they make the right decisions. This is also an age where the habit of savings, investments need to be imbibed within the individual to an extent that few decisions can be taken subconsciously. This is also an age where financial prudence (especially that related to spending and risk taking) need to be developed.
- Middle-Aged Individuals (ages 41 to 64 years): At this age, things start settling down and major life decisions are being made. All the chaos as a Young Adult has taught valuable life lessons and this age is when most of the decisions about preparing for retirement firm up. Most likely the need for protection of the most important asset of your being (your own life) takes precedence. Financial protection of dependence and prudent use of money become key priorities.
- Retired Adults (ages 65 years and above): All the hard work has been done, it is time to enjoy fruits of labor or repent on bad decisions and financial habits. Health needs more attention and so does the quest for completing the bucket lists that were left out during the work years. Most of the responsibilities are fulfilled and it is a race to outlive the residual savings.
Lifestyle & Savings
One’s lifestyle has a significant bearing on spending and thereby directly impact the overall savings potential. There is spending that you can control like enhancements to home, new car purchase and these are called discretionary spending. On the other hand, your phone, electric bills, home mortgage EMI are spending that you cannot control and are called mandatory spending. Several life events also determine your lifestyle. Whether you are single or married, with or without kids, number of earning family members, spending on travel, outings, dining. All these factors can significantly swing the pendulum on savings capacity.
There is a location aspect to the lifestyle as well. Do you like to live in the city center, a posh locality, a suburb, on the outskirts of the city or a semi-urban or rural area? Would you rather prefer to stay in a rented apartment, own a condo, a townhome or a single-family home (other and more exorbitant categories are not mentioned as they would not be reading this).
