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The Life Cycle of Financial Planning: How to Manage Your Money at Every Stage of Life

Dani is a college student who grew up broke and decided to change. They write about business, personal finance, and money management.

Planning to spend within your means in an important part of personal finance.

Planning to spend within your means in an important part of personal finance.

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 at all stages of your life. The planning process is integral to being successful in your personal finance.

What's In A Financial Plan?

Before we start throwing financial jargon around, it's important to know that the elements of a financial plan are simply the different parts of your money situation. You don't have to have all the answers right now. Financial planning is an ongoing process.

  • Financial goals: This is the first thing to develop when you begin your plan and it takes some thinking about what's important to you. Are you planning on owning a home or going back to school? Do you want to retire early? Would you like to buy a motorcycle and move to the city? Are you simply wanting to pay off debt and increase your credit score? When you make these goals, remember to keep them SMART: Specific, Measurable, Achievable, Relevant, and Time-bound.
  • Personal net worth statement: Your net worth is all the money you have minus all the money you owe. Take into account debt, including credit cards, mortgages, auto loans, and even that mattress you bought you're still paying on from last year's President's Day sale. Don't forget to include paid off assets like any paid-off vehicles.
  • Cash flow analysis: This step is much more simple than it seems. A cash flow analysis is a document that compiles all your income and subtracts your expenses. Typically, these documents are used for businesses, but they can be helpful when planning personal and family expenses.
  • Retirement strategy Your retirement strategy can be as complicated or simple as you'd like. This can include regular contributions to your company's 401K, your own personal ETF, or trusty CD's at the bank. The most important thing is to have a plan and to start early.

Why Does My Age Matter When Managing Money?

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 should handle money is different than how someone preparing to retire should handle money. Teenagers have to worry more about saving for their education than preparing a will, and new families may not have as much extra income to spend on fun things as retired couples.

That's why financial planning can be broken down into five main ages, 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. Sometimes life throws you a curveball and you have to make changes; this is just a general guideline.

The 5 Stages of Financial Planning

  1. Teenage Years (13-17): The focus of these years is to learn the basics of money and to finish a high school diploma and preparing to further your education.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

  1. 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, the next stage, to be as profitable as possible.
  2. 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.
  3. 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!
Teenagers have different expenses then people at other life stages.

Teenagers have different expenses then people at other life stages.

Stage #1: Financial Planning as a Teen

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 iPhone... 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 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. There are a few key things you'll need to learn about money, like:

  • How to open and manage checking and savings accounts
  • Understand how and/or when to use credit
  • How to make and stay on a budget

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, because you have family and friends who can help you out. As you get older, not so 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.

Build Credit As Soon As You Can

One of the most important and easiest steps you can take for your financial future is to build your credit. The most straightforward way to do this is to apply for a credit card, but choosing the right card is essential. Being turned down for a card can put a ding in your score, so you're going to have to do some research. There are several things to consider when applying for your first credit card. The first is that you will have no credit, making you very risky to lenders.

NerdWallet.com is an excellent resource for comparing credit cards without much hassle. I chose Capital One Journey for my first card and I highly recommend it, but be sure and look into all your options to find the perfect fit for you. Your first account will likely a secured credit card, which required a minimum deposit that you pay against.

Avoid Debt

Having a credit card is a big responsibility and it's easy to get in over your head. A credit card can be an excellent tool for building great and even scoring deals, but a single missed payment can knock points off your credit score for years. Another common source of debt for teenagers is the purchase of a first car. I strongly recommend buying your first car in full and not on loan.

Adulthood comes with independence and freedom - but also responsibility.

Adulthood comes with independence and freedom - but also responsibility.

Stage #2: Managing Money in Young Adulthood

Adulthood is a scary time. You're out of the nest and you're just starting to build 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.

Higher Education

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 into 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.

According to Experian’s seventh annual State of Credit report, the nation’s average credit score was a 673 in 2016 (Detweiler).

Stage 3: Planning to Start 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 to gain 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 have 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.

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?

College Funding

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 saving as soon as possible.

Stage 4: Preparing for Retirement

Retirement is a scary word, and like anything else, it's even scarier if you haven't planned for it.

Decide What Retirement Means for You

For some people, retirement means golf and rest and relaxation. Others want to give back to their community by volunteering or travel the world. There is no wrong answer, but it's important to decide what choices you'll be making, especially if you're married.

Having a concrete plan about your goals after retirement will make you feel much more secure in your decision. Some examples of goal-setting after retirement are:

  • Visit London my first year of retirement
  • Volunteer at an animal shelter two days a week
  • Research and publish your family genealogy

5. Enjoying Retirement

Cut Down Expenses

With a limited income, it's important to manage your expenses carefully. You should be enjoying your retirement, but make sure your resources aren't being wasted on things you aren't using. Check your credit cards and bank statements for reoccurring services you don't need to make the most out of your money.

Consider Sustainability

More than just a buzzword, sustainability is an important way to keep the money you've earned. This can mean a lot of things - tending a vegetable garden, switching to reusable napkins, buying used clothes - but it all helps keep the planet green and your wallet fat.

Works Cited

Detweiler, G. (2018, May 21). What is the Average Credit Score in America? Retrieved November 23, 2018, from https://www.credit.com/credit-scores/what-is-the-average-credit-score/

Gallup, Inc. (2018, May 10). Snapshot: Average American Predicts Retirement Age of 66. Retrieved from https://news.gallup.com/poll/234302/snapshot-americans-project-average-retirement-age.aspx

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2018 Dani Merrier


Marcy Bialeschki from Cerro Gordo, IL on April 27, 2020:

I absolutely love your breakdown of stages. Many young people do not think they have enough money to save. I tried to teach my girls to save something, anything, every time they got a paycheck. It all adds up over time. You sound like you have a great handle on finances and your life. Great article.

NAVTEJ SINGH MATHAROO on April 05, 2020:

Please guide me

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