The Four Stages of a Person’s Financial Life Cycle
From the time we first begin to earn our own money to the moment we give up our income altogether as we enter our retirement, our lives tend to follow four stages that make up our financial life cycle, with each stage determining what we should be doing to nurture our financial health at that particular time.
With this in mind, here are the four phases most of us go through – and the accompanying financial milestones we experience – as we progress through our financial life cycle.
Stage One: Early Career.
As we first enter our careers, securing our first full-time income in the real world – maybe we’ve just left home or recently completed higher education – we typically earn a smaller income than later in our careers.
Already, we may have accumulated debt during this period – such as student loan debt – and some in this stage of life even marry and start a family or borrow money to buy a house, often making loans and the subsequent debt unavoidable.
During this time, the best thing you can do is develop good financial habits from the outset and – as much as possible – live below your means, spending less than you earn and saving as much as possible (unless you have high-interest debt that would be better paid off sooner, then you may want to prioritise paying this back over stockpiling your savings).
This is also the ideal time to plan your finances in the long term, considering where you want to be in the next few decades and figuring out how you’re going to make that happen. And, if you can afford to, without compromising on your savings or debt repayments, this period presents an excellent opportunity to invest and make the most of long-term market growth.
Moreover, although at this stage, retirement seems like a lifetime away (and it nearly is), it’s never too early to make a financial difference to your golden years by starting a Personal Pension Plan.
Stage Two: Becoming Established.
As a person becomes more established in their career, typically earning a higher income and having had more experience managing their finances, there is less emphasis on managing income and cash flow.
Instead, the focus is more on the management and growth of wealth. You may decide to invest in investments such as property to diversify your sources of income or invest in stocks or funds in the stock market – backed by research into the individual stock/fund, the economy as a whole and the investment strategies most likely to reap results for you.
In addition to growing wealth, this stage should be accompanied by detailed planning for the future, which may include saving for future expenses such as children’s education, preparing for eventualities such as death and illness with insurance and wills and planning carefully for retirement, storing as much money away in retirement accounts as you can comfortably manage.
Stage Three: Nearing Retirement.
When you’re nearing retirement, you’ll be able to see more clearly whether the plans you’ve made in the earlier stages of your financial life cycle support the retirement you envision.
You may take this time to adjust your plan, considering any life changes that may affect the costs required for your retirements, such as health concerns or new ambitions for your retirement, such as travelling the world.
And, unlike the previous stages of a person’s financial life cycle, you can conceive what your retirement is likely to look like since it’s just around the corner. As such, you can begin to decide what withdrawal strategy you intend to use – some common ones include the 4% rule, fixed- withdrawals and systematic withdrawals – to best suit the funds you have and the lifestyle you intend to lead.
Moreover, this is the time you should be working towards paying off any outstanding debt, including mortgages, so that you can walk into your retirement debt-free, without the need to account for debt repayments within your financial retirement plan.
Lastly, as with every other phase in your financial life cycle, you should be doing what you can to increase your savings and grow your investments.
Reviewing your retirement portfolio regularly is just one of many ways you can take steps towards a life of financial independence and confidence. Adjusting your investment strategies based on your goals, age, and tolerance to risk can help you take control over financial stability in retirement.
Stage Four: Retirement.
The golden years have arrived – but so has the time when you’ll no longer have the reassurance of an employer-provided income. Instead, you’ll be paying yourself from the finite nest egg you’ve accumulated over the earlier stages of your financial life cycle.
The critical consideration during this time will be not to overspend early – the last thing you want to do is to scrape by in your later retirement years because you made rash financial decisions in your first few years of retirement.
So, it’s likely you’ll want to employ the budgeting skills you learned in the first stage of the financial life cycle to ensure you can maintain your standard of living throughout retirement while accounting for the likely rise in health-related costs and the possible need for assisted living.