Life is in stages, and the end of each stage signifies the beginning of another new stage for all humans.
Our lives are made of an accumulation of our experiences at each stage on earth.
There are three distinct stages of your financial life. These stages are wealth accumulation, wealth preservation, and wealth distribution.
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Like every other stage of human development and endeavor, you must successfully pass through the previous sector to enter the next phase.
Your decisions at each financial planning stage will determine your economic fate.
In this article, we will look at these three stages of finance and how you can successfully pass through each stage without hitches or failure.
Let’s take a look together.
Wealth accumulation
This phase has to do with saving from your earnings. It is the building and growing phase of financial life. At this stage of planning for the future, you must diversify your income and make the most of the opportunities that come your way in life. Your 20s and 30s are the most likely time for building a solid financial foundation.
This is the point of sitting down and analyzing your goals by looking at where you are now and where you intend to be at your retirement stage or old age. Timing is crucial; the earlier you start, the better off you will be.
Having a saving culture from an early age, even at a modest level, will go a long way in accumulating wealth in the long run. Every amount you put in overtime will pay off, placing you at the next stage of life.
These steps will help in building up a financial savings plan:
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Examine and set financial goals.
This begins with writing a list of your present monthly expenses in terms of transportation costs, food, cost of housing, food, entertainment, education, clothing, and other daily essentials. After that, deduct these expenses from your income, and you will know about possible savings.
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Set a budget.
The next step is to divide your income into what you intend to spend and that which you intend to save. You can use the 50- 30-20 formula, broken down into what you need, want, and savings.
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Have a saving strategy.
This involves prioritizing your needs in terms of relative importance. Depending on how much you intend to save, these can be done once at a time or simultaneously.
- 401(k) plan: This is a tax advantage account made available through an employer. It is beneficial to contribute monthly to meet your retirement goals. If your employer offers it, take advantage of the matching options, as it will help to grow your savings.
- Individual retirement account: This is popularly called IRA; a financial planner can help explore your retirement account options and advise on future savings.
- Money market accounts: These give higher interest rates than a savings account. Also, it allows you to write checks and use debit cards for withdrawals.
- Emergency funds: This involves having cash at hand for unexpected car repairs or medical bills. Experts recommend putting aside a minimum of three to six months’ value of living expenses in an interest-generating savings account.
What should be your financial priorities?
It is critical at this stage to pay off any debt and work toward building your credit to put yourself on a stable financial footing for the next stages. It would help if you took advantage of the salary increase whenever possible.
How do you invest?
This stage signifies the start of your investment opportunity. Your main priority is maximizing your tax advantage retirement accounts and getting to a point where you can invest a minimum of 15% of pre-tax income. It is wise to start now rather than take advantage of compounding savings. While investing, put your focus on long-term growth.
Wealth preservation
Now that saving has become a habit and a culture that has grown over time, you start thinking of how your retirement or old age will look.
By your forties, you will likely be at the peak in earnings and enjoying a better quality of life than your youthful age.
There is a need to put these savings into long-term and short-term investments.
These investments will need to be evaluated, and you need to know what you want from them at retirement.
This is subject to your retirement goals, which must be well-aligned and detailed to enable you to achieve them.
At this point, there is a need to look into business succession, taxation strategies, and annuities.
Please look at your retirement portfolio and the areas where it is thriving and where effort needs to be put in place to deliver desired goals effectively.
You will likely have to take less retirement portfolio risk and ensure the financial stability of your children as well.
Long term investments
These are assets that a company or individual proposes to hold for three or more years. Instruments of long-term investments include stocks, cash, real estate, etc.
They are not subject to any form of adjustments due to temporary fluctuations in the market and have a substantial level of risk in pursuing higher returns.
Advantages of long-term investment
- It has the benefit of dividend income and interest on fixed deposits.
- Less time spent monitoring the market fluctuations daily.
- Lower transaction fees.
Short term investment
These are made within a short period to make a quick return on investment. Short-term is a necessary part of any financial portfolio but should not be the only strategy employed in wealth creation.
Companies and individuals investing in short-term capital aim to generate income like a treasury bill, mutual fund, and commercial paper.
An organization or individual must meet two conditions to categorize an investment as short-term.
- The security must be liquid; this means the investment can be bought and sold fast without affecting the price.
- Management should plan to sell the security in a relatively short period, within one year.
What should be your financial priorities?
At this point, your top priority should be growing your wealth. You should engage in both saving for your children and making investments for retirement. Formulating a retirement plan as you progress in your career is important.
As your assets increase, consider creating a will that can be updated as you succeed. This ensures that your financial affairs are put into order during an eventuality.
How do you invest?
In this second stage, you should set your investment into growth mode. Now that you have covered the financial basics and yet have about 30 years from retirement, you can afford to take a little more risk and invest aggressively with financial expert advice.
As you build your wealth portfolio, you must ensure your asset allocation aligns with your risk tolerance and set time horizon.
Diversification is important as it is too much of a risk to place all earnings in one venture.
Depending on your individual goal and how much risk you can bear, you can add mutual funds to your portfolio, individual stocks, real estate, or other alternative investment opportunities.
Wealth distribution
This stage is referred to as the distribution and deployment phase. An individual becomes more conscious of retirement from sixty years of age.
Your retirement plans and investments have started producing dividends, beginning a year before making withdrawals.
Like the preservation stage, you need to look at your portfolio investment to make adjustments where necessary.
The goal of the distribution phase is the reduction of investment risk.
While making plans, put into action moving a part of your portfolio into safer investment packages.
This is to avoid being affected by a sudden shift in the market, which could affect your earnings.
The way you distribute your money affects how long it lasts. At this phase, you need the service of an experienced wealth manager.
A wealth manager will provide investment strategies and tax considerations that best suit your retirement needs.
Also, consulting an estate planner can help allocate your legacy and wealth distribution to your beneficiaries.
What should be your financial priorities?
At this stage, a good amount of consideration should be given to managing retirement funds to ensure they last a lifetime. This may involve making a budget and being committed to living on a fixed income.
At this final stage of the financial stage of one’s life, all must be put into place in passing off any wealth to your loved ones in the most tax-efficient manner. Preparation of a will is helpful in the eventualities and peaceful transition of wealth gathered.
How to invest?
At this stage, investing should be about playing it safe and cashing out advantageously. It would help if you had a plan to use your investments to support yourself at retirement. For example, you can sell off your investments gradually or decide to live off the dividends earned or rental income from properties you own.
Conclusion
It is important that your investment goals are clearly defined and your portfolio regularly is readjusted to ensure risk minimization.
Employing the help of a financial analyst will help ensure that you make the best investment decision that is suitable to fit your goals.
FAQs
- What are the three financial stages of life?
The three financial life stages are wealth accumulation, preservation, and distribution.
- How do stages of life affect making financial decisions?
An individual’s age and life stage affect income sources, spending needs, asset accumulation, and risk tolerance.
- What are the factors that affect a person’s financial decision?
Factors such as age, marital status, number of members in a household, and employment status influence financial decisions.
