- Personal Finance
Personal Finance 101: The Life Cycle of Financial Planning
What is Financial Planning?
Financial planning is the process of setting and deciding how to reach financial goals. This includes creating a budget, tracking expenses, and planning for the future.
As vital as these plans are, the most important step is the execution. Ideas on paper and words written in a planner mean nothing if you don't follow through.
The 5 Life Stages of Financial Planning
Few people have the same goals as they did ten, five, or even a single year ago. More so than that, the way a high school student handles money is much different than how someone preparing to retire handles money. That's why financial planning can be broken down into five main stages, listed below. Keep in mind that these ages are not set in stone and you may progress slower or faster than the estimates I've provided.
- Teenage Years (13 - 17) The focus of these years is to learn about the basics of money and to finish a high school diploma and preparing to further your education.
- Young Adulthood (18 - 25) The next step in your financial career is to gain and maintain financial independence while pursuing higher education, which may or may not involve a university degree.
- Starting a Family (26 - 45) Whether your goal is a house full of kids, sharing your home with your spouse, or anything in between, the biggest part of this stage is preparing for the financial responsibility that comes with having a family.
- Planning to Retire (46 - 64) With retirement in your sights, this stage of life is your largest source of income. Children are typically moving out and diaper bills are considerably lower.
- Successful Retirement (65 +) You've finally reached the time to reap in full what you've sown!
These are the five stages of financial planning, which discuss the lifespan of an individual and are characterized by one's stage of life and financial situation. This idea is expanded on further in the three tiers of wealth management.
The 3 Stages of Wealth Management
The three stages of wealth management are spread out over the five stages of the financial life cycle. They include wealth protection, wealth accumulation, and wealth distribution. I will touch on these topics lightly and will include a link to another, more comprehensive resource later on.
- Wealth Protection This is the first stage in your career and begins as soon as your teenage years and usually stops upon finishing your education or beginning a career. At this point, your main focus is education - which is a protection and asset to your potential earning power. You should also try to avoid debt as much as possible, allowing your prime earning years to be as profitable as possible.
- Wealth Accumulation As you move from part-time jobs to your career, your wealth accumulation stage begins, usually between starting a family and planning to retire. This is when you make the most money and your income peaks with your experience and financial stability.
- Wealth Distribution This is the final stage of wealth management, which takes place for most people in the retirement years. Estate planning is vital if you haven't completed these arrangements already, as well as end-of-life planning. As grim as these preparations may seem, the wealth distribution designed to be the calmest and most content stage. Make your plans and then relax a little!
Financial Planning Starts in the Teenage Years
The reality of money really starts to set in during the teenage years. We have to make our first real financial decisions, like how to buy that ladykiller of a first car, that expensive video game, the newest cell phone... All of these purchases have something in common: they're things we want, not things we need. This gives us a little leeway to spend our extra cash on things adults might find frivolous and to make a few mistakes. It's a safe zone of sorts, where our parents can still pick us up if we fall and we don't quite have enough resources to fall too hard to begin with.
Learning the Value and Role of Money
While teenagers may not have the most important decisions to make at this stage of life, they do have some of the most important things to learn. Many teenagers get a part-time job while in high school to pay for things they can call their own. This helps them develop a sense of responsibility and value of the dollar. Sure, they could buy that $6 coffee, but that takes money away from that new pair of jeans or their best friend's birthday present. You start to realize that you don't have money for everything and you learn to prioritize pretty quickly. If you are the parent of a teenager, now is the perfect time to instill in them the importance of a budget and how to stay on track with their savings goals. If you're a teenager reading this, then you're already one step ahead of the game!
Preparing for Adulthood
There's a lot to learn before you're ready to move out on your own and start your trek towards financial independence. You have to know what a budget is and how to balance one, how to bank confidently, and how to handle your money after you move out.
Start an Emergency Fund
I only learned one usable thing in my high school Physics class: Murphy's Law. Simply put, if something bad can happen, it will. I'm a shining example of this. In fifth grade, I broke my wrist running up a hill. I get the flu if I watch a video of someone sneeze. My car just recently stopped working five minutes from my house because I used the wrong key. If something is going to mess up, it's going to be with me. When you're a teenager, most of these emergencies won't impede your lifestyle too much.
Since I've started an emergency fund, I can't think of a single emergency I've had. The more prepared I've become, the less prepared I have to be. According to Dave Ramsey, an emergency fund acts as "Murphy Repellent." It keeps bad events from happening simply because you're ready for them.
While I'm not going to cover the entirety of an emergency fund here, a good goal for a teenager is to save $500 dollars, to begin with. Eventually, you would like to save 3 - 6 months worth of income (for emergencies) and that number would increase as your income increases.
Financial Seeds Are Sown in Young Adulthood
Adulthood is a scary time. You're out of the nest and you're just starting to build up the muscle up on your wings. Yet, it's invigorating. The choices you make are yours and the world is yours to conquer - and you have plenty of them. This stage in the financial life cycle is full of tough decisions that will follow you for the rest of your life.
Hopefully, you've successfully graduated high school before reaching adulthood. If you haven't, I recommend fixing that as soon as possible. However, assuming you've finished high school or have an equivalent certification like a GED, your next step would be to pursue your education even further.
We've all heard the sermons on the value of higher education and the college students across the country who are going in debt to achieve it. Higher education doesn't always mean a four year university degree, and for a lot of people, it isn't the right option. The truth is, for many people, an associate's degree or a trade school is better. For others, a certification or a few extra classes will do the trick. The point is to set yourself apart from other candidates and gain marketable skills.
Beginning A Career
By this stage, you've likely had several jobs before that bought you that first car or helped you get through college; it's equally as likely that you didn't enjoy it. Now is your chance to change all that and to begin a career, not a job.
There are so many different avenues to take that depend on an individual's interests, skills, and educational background. The most important thing about choosing a career is finding something you love that will support the way you want to live. Balance is an essential element here.
Start Your Retirement Fund
You just finished college and landed that (kinda) dream job that will lead to your career. Interest is a beautiful thing. The earlier you begin to save, the faster it grows. It is entirely possible to become a millionaire with just $100 a month - and the earlier you invest, the sooner it happens. That boils down to lattes and pizza money for most of us. All you need is the dedication and a bit of investing knowledge to start.
Financial Planning for Starting a Family
Family means different things to different people. For some, it might be two spouses with a house-full of kids, for others, it might be taking care of the family you came from. Regardless of what it means to you, entering this phase of the life cycle brings significant changes.
The Responsibility of Financial Independence
While you started this journey while entering adulthood, by making the commitment to start a family you've solidified the decision financial independence. You're not on your own anymore - you have others to think about.
If it hasn't hit home before, it needs to now. You're at a point in your life when you've come almost full circle. Your family and community has been supporting your growth until this point - now it's time for you to help someone else.
Marital Money Management
Two can't always live cheaply as one, and it's important to realize that before you decide it's time to settle down. The number one cause of divorce in the United States is money problems, so if you can't agree on a budget, you might have to agree on alimony.
The number one cause of divorce in the United States is money problems, so if you can't agree on a budget, you might have to agree on alimony.
When you get married, it's much different than having a roommate. Sure, you'll still split the bills - but you never had to plan your life out with your dorm-mate in college. A lot of people take the other person's opinion for granted, thinking that since they're married they know all there is about the other person. However, there are a few key financial issues that need to be sorted out before you even tie the knot:
- When and how would you like to retire?
- Do you want kids and are we going to pay for their college?
- How often are you going on vacation?
If you do decide to have children, you have an important decision to make: are you going to pay for their college? While there is no right or wrong answer if you choose yes, then it is vital to start savings as soon as possible.