ONE’S FINANCIAL LIFE has four main stages – young and dependent; working and relatively independent; wealth accumulation; and retirement.
Any one of these stages can dominate one’s life, depending on specific personal circumstances. For example, due to illness, poor coping skills or immaturity, some people remain dependent all their lives. Then, there are the workaholics who find it difficult to retire.
What is your current stage of life? It is important to identify one’s stage of life in order to set relevant financial goals and to plan appropriately for improved finances. It is remarkable how we spend so much time and effort earning a living, compared to the miniscule time we spend setting financial goals and planning our finances.
The first stage of financial life typically is between birth and, say, 25 years old. That is when someone else has to see about all our emotional, physical and financial needs as an infant, a toddler, and through our kindergarten and primary school days.
Later, through our primary school days and on to the tertiary education period, we become increasingly independent, yet typically still some financial burden on our caretakers.
In this stage we are preparing for work through education, training and development. Sometimes this involves undertaking student loans and other credit which may be repaid during the next stage. It is during this stage that we may open a bank or credit union account and get our first credit card.
The second stage begins when we start to work, earn and pay our own way, say, starting around 25 and going until 45 years old. Getting a job may be delayed due to lack of employment opportunities.
However, once that job is secured, second-stagers are eager to purchase a vehicle or spend money socialising and on entertainment. But there may still be that student loan and credit card to repay. During the working stage, they may also consider home ownership (a mortgage loan) and life insurance. If any funds are left over, investing may also be an option.
It is typically during this stage that couples get married and have children (and the financial life cycle thus starts all over again).
Eventually, with care, the third stage is reach where finances are relatively settled, loan payments are manageable and it is possible to increase the saving rate in accumulating wealth. This would normally be between 45 and 60 years old.
Bold third-stagers would consider investing to meet their children’s education and for their own retirement; they may even consider having a second home or even investing in real estate. There may also
be improvements/changes in their lifestyles.
The fourth and final stage is retirement, which occurs typically after 60 years old. At this stage, with proper planning, people may be in a position to retire earlier than the normal 65 years old. The point is they are focused on their retirement. Adjusting their lifestyle needs to suit and looking at their legacy plans with greater clarity are important factors. Many people who have observed and planned these stages of their financial life adequately will find themselves disposed, and also in a position, to be philanthropic, giving back to society.
This is a broad view of the typical financial life cycle. Hopefully, you are progressing adequately through yours. Next, we will look at specific planning for the stages and for typical pivotal events during the financial life cycle.
Louise Fairsave is a personal financial management advisor, providing practical counsel
on money and estate matters. Her advice is general in nature; readers should seek personal counsel about their specific circumstances.
