Wealth generation

20s

Have enough in your account to cover six to 12 months' basic expenses

At this age, you should be ready for change and uncertainty. There may be job moves, marriage plans, and hopes of buying a first home, so the main thing is not to commit too much of your income to something too long-term or illiquid. After college, there is probably not a lot sitting in your bank account. Therefore, take a close look at where your monthly income goes. Too many people know their cash flow, but don't analyse it. Giving your parents something towards household expenses may be an obligation, but if HK$2,000 to HK$3,000 a month is going on drinks, karaoke nights and taxis, ask yourself why and be realistic. Of course, it is a very subjective thing, but even if you have a relatively high income it is a mistake to think that what you spend today can simply be earned again tomorrow. A good rule of thumb is to build up enough in your bank account to cover six to 12 months of basic living expenses. The economy may be good now, but young people are still vulnerable to changes in the job market. The idea of running up credit card debt should be a big 'no'. You can never beat the system, and the risk of relying on this is just far too great. If contemplating an MBA, remember that many schools accept payment in instalments. And if planning a wedding - this may be hard - but be practical and know what you can afford.

Put in place the building blocks for the long term

Recent graduates and people with a couple of years' work experience characteristically see themselves as risk takers. They see the appeal of high-risk investments and want to 'explore' financially by looking at different markets. In one sense they can afford the risk because, theoretically, they have many years to keep earning if something goes wrong. However, they should really look at traditional areas - cash, bonds and equities - not sophisticated investment vehicles. In building up an equity portfolio over five to 10 years, it is possible to learn how capital markets work, and make reasonably good returns. Most important is to commit to a regular savings scheme. It is something of a mantra that the earlier you start to save, the less you need to save every month, but the figures prove it is true. Younger people tend to focus on shorter-term goals - a car, an apartment, marriage. But the overall aim should be to put in place building blocks for the long term, and not to think simply in terms of 'saving for my first car'. Assuming you join an employer's MPF scheme, there is no harm in choosing the most aggressive funds on offer. If the markets decline, they will have time to bounce back, and there will be the benefit of buying at lower prices.

A good target is to put aside 30 per cent of your monthly salary

The average lifespan for women in Hong Kong is 85 - six years more than for men - and, for family or other reasons, many of them leave the workforce well before official retirement age. So, with generally shorter careers but longer lives, it is vital they start accumulating wealth as early as possible. That means forming the right habits when young and forcing oneself to save before spending. Failure to do this can be a recipe for disaster in later life. It takes self-discipline, but a good initial target is to put aside 30 per cent of your monthly salary. Divide this between a deposit account, a low-risk regular savings plan based on mutual funds, and perhaps some individual stocks. You should definitely get life insurance soon after becoming an independent wage earner. This involves making decisions about beneficiaries or dependants and their likely needs, but it makes no sense to postpone. Premiums are lower when you are younger and the formalities are comparatively straightforward. Also, get into the habit of reviewing insurance cover every couple of years. The requirements will inevitably change as your earning power and liabilities do. Avoid borrowing for 'fancy things' like jewellery, a holiday or a car. Instead, train yourself to pay for such things by squeezing a bit more from daily expenses or dipping into your regular savings.

30s

It is a trade-off of today's living standards against tomorrow's

In ideal circumstances, you may be able to accumulate wealth quite nicely before having children, but all prospective parents should study the likely costs well in advance. Even kindergarten is expensive, and there are likely to be all sorts of extra-curricular activities as well in the years ahead. If you plan to pay for these from monthly income, rather than from 'reserves', then consider what that will mean for the family's lifestyle. Also, don't make the mistake of thinking compulsory MPF contributions will guarantee a comfortable retirement. You may have to cut down on holiday expenses or other costs in order to put more into a retirement savings plan. It is a trade-off of today's living standards against future living standards, but must be done. Even when budgets are tight, you should try to squeeze an extra HK$500 a month for a retirement fund. A good starting point is to re-examine which fixed fees and direct debits you are paying, make sure to claim all available tax deductions, and check actual insurance needs. For example, when taking out a mortgage, people often increase their whole life insurance. They might do better getting term insurance instead, and end up saving more money.

The focus should be on three to five mutual funds

Individual scenarios can vary greatly, from still single with few liabilities to married with a couple of kids. But human nature generally dictates that once people move into their 30s, they are more settled, have clearer goals and become more disciplined in spending their disposable income. Typically, this can mean they have the resources and maturity to look at alternative investments such as hedge funds, emerging markets and structured notes. However, the focus should still be on three to five mutual funds, which are periodically reviewed. After starting a mortgage, the idea of investing in other property may seem attractive. But you should seriously consider if you can really afford the time and money. Even if rented out successfully, any property is a big commitment. Rather than putting surplus funds into this, a better option may be to shorten the payback period for your current mortgage, provided this does not adversely affect your liquidity. Anyone with a family should consider extra life insurance and start estate planning. It is also advisable to keep an emergency cash reserve, usually in a time deposit, even in a low interest rate environment. Deciding how to split the monthly budget is always a personal matter, but financially successful people tend to save what they want and spend what's left over, rather than vice versa.

Secondary school and university can amount to HK$1.5m per child

If you are still single with steadily higher earning power, your accumulated assets could already be as much as HK$1 million. Some of this can be used for diversified lump sum investments. A good balance includes putting most of the available sum into blue chip stocks and mutual funds, with perhaps 30 to 40 per cent into more aggressive themed funds, focusing on areas such as energy, property or domestic consumption. If married, you should definitely sit down periodically and ask some of those awkward 'what if' questions. For example, it is essential to consider how the family would manage if husband or wife passed away. Any change of family circumstances would certainly mean new priorities, but having sufficient insurance of the right type - medical, disability or loss of income - will minimise foreseeable financial problems. Remember that the cost of children's education can be huge. Secondary school followed by university overseas can easily amount to HK$1.5 million per child, and that is without factoring in inflation. Some good software programs make it easier to calculate all the variables, but as a guideline, you might need to set aside HK$10,000 a month in an education fund. Generally, it is better to put this in less aggressive global equities or bonds. In that way, you can expect steady gains, while fine-tuning your investment at least every couple of years.

40s

It pays to do a top-to-bottom review of your investment strategy

The good thing is that you can manage assets anywhere in the world from Hong Kong. Therefore, it is possible to set up realistic and achievable goals for retirement, such as buying property overseas, while keeping a close eye on all manner of financial information and updates. As people get older, their major interests often change. The prospect of holidays in exotic locations may no longer be so enticing, and medical considerations are likely to become more of a factor. Therefore, it pays to do a top-to-bottom review of your investment strategy to ensure it will really meet future needs and provide a sufficiently large regular income. If necessary, get a personalised health insurance plan. Also, be ready to restructure your assets, perhaps with advice from a private bank, so there is no chance at all of everything being 'wiped out' by a downturn. Increasingly, you hear of people developing an interest in various 'collectables', which can be anything from wine to vintage cars. They may make money but, in general, these are more a hobby than an investment.

Try to lock in gains by gradually reducing the proportion held in equities

By now, your income has probably peaked, but the countdown to retirement has already begun. Remember that if stock markets are volatile, the value of investments can easily drop by as much as 20 per cent. Therefore, try to lock in gains by gradually reducing the proportion held in equities to less than 50 per cent of the total and move more towards bonds or fixed-income products. Maintain the habit of saving regularly. Also, consider carefully which expenses will increase in later life. Medical costs are the most obvious, so extra insurance for critical illness should be a priority. Be sure, though, exactly which illnesses and treatment the policy covers. All being well, it may be time to start thinking about some of those 'dreams', like a luxury car or a holiday home. However, the less exposure you have to loans or mortgages, the better. So, don't assume, for example, that owning a dream resort house in Phuket is the best option. If you spend only a few weeks a year there, other arrangements could make better financial sense.

Attention should now turn to risk and return management

Assuming someone has made the right moves in accumulating assets and creating a balanced portfolio, they should now turn their attention more to risk and return management, rather than adding something new. People commonly set a target of, say, HK$10 million for their retirement. However, any calculations are based on today's known facts and don't necessarily take into account longer life expectancies or debilitating illness. At this age it might seem best to adopt a very conservative investment strategy, but there is always risk with currencies and inflation; it's just a question of how you manage it. After Sars and the economic downturn, Hong Kong investors were generally smarter about focusing on both risk and return. Now, they seem more interested in chasing the 'best' investments, forgetting about the downside risk, which can easily lead to trouble. If you are not yet on track to meet retirement targets, you must take urgent action before it is too late. Telling people to accept a reduction in living standards and save more is never easy, but sometimes you have to bring them back to reality.