Daniel Merrier grew up broke and decided to change. He writes about business, personal finance, and money management.
Many people think of money management and financial planning as static concepts whose fundamentals don't change very much over time. In fact, the way we approach our finances can and should change as we progress through the different stages of life. This article discusses strategies for financial planning and money management as they relate to aging and where an individual is in their life cycle.
- What Is Financial Planning?
- The 4 Components of a Personal Financial Plan
- Why Does Age Matter When Managing Money?
- The 5 Stages of the Financial Planning Life Cycle
- The 3 Stages of Wealth Management
What Is Financial Planning?
Financial planning is the process of setting financial goals and deciding how to reach them. This includes creating a budget, tracking expenses, and planning for the future at all stages of your life. This planning process is integral to being successful when it comes to personal finance.
Financial planning isn't just about saving and spending money. Education, career moves, and life goals should factor heavily into any financial plan. In fact, saving and spending habits should change over time and should vary depending on an individual's short-term and long-term life goals.
The 4 Components of a Personal 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. The four basic parts of an individual financial plan are as follows.
1. Financial Goals
Financial goals are among the first things you should develop when you begin your plan, and defining these goals requires some serious 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? Do you simply want to pay off your debt and increase your credit score?
When you make these goals, remember to keep them SMART: specific, measurable, achievable, relevant, and time-bound. The better-defined your goals are with respect to these five characteristics, the more likely you are to achieve them.
2. Personal Net Worth Statement
Your net worth is all the money you have minus all the money you owe. In some cases, this number is positive, while in others, it's negative. Do your assets outweigh your debts or vice versa?
In the positive category, don't forget to include assets like paid-off vehicles in your net worth. When evaluating non-money assets, however, it's important to be realistic. You may own your car outright, but now that it's got 150,000 miles on it, it's definitely not worth as much as it was when you purchased it.
In the negative category, take into account any debt you carry, including credit cards, student loans, mortgages, auto loans, and even that mattress you bought that you're still paying off from last year's President's Day sale.
3. Cash Flow Analysis
This step is much more simple than it seems. A cash flow analysis is a document that compiles all of your regular income (paychecks, child support payments, etc.) and all of your periodic expenses (rent, phone bill, etc.).
Typically, these documents are used for businesses, but they can be just as helpful in personal and family financial planning. If your monthly income is higher than the sum of your monthly expenses, the difference is what you have leftover to work with in terms of saving, investing, and making purchases.
4. Retirement Strategy
Your retirement strategy can be as complicated or simple as you'd like. Everybody's plan looks a little different. Yours could include regular contributions to your company's 401K, your own personal ETF, a trusty CD, or a Roth IRA at the bank. Whatever you choose, it's important to have a plan and to start early.
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Why Does Age Matter When Managing Money?
Few people have the same goals as they did ten, five, or even two years ago. 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.
While a newly minted high school graduate might be focused on furthering their education to increase their employability while building credit via credit cards and student loans, someone approaching retirement might be more focused on reallocating the investments in their retirement account toward dividend-paying stocks that could provide them with passive income during their retirement.
That's why financial planning can be broken down into five main life stages. Keep in mind that these stages 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 the Financial Planning Life Cycle
- Teenage Years (13–17): The focus of these years is to learn the basics of money, finish high school, and prepare for further education and employment.
- Young Adulthood (18–25): The next step in your financial journey is to gain and maintain financial independence while pursuing higher education, which may or may not involve getting a university degree or professional certification while working and building credit.
- 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 typically move out during this stage, so it can be easier to save money than it was during the family stage.
- Successful Retirement (65+): You've finally reached the time to reap in full what you've sown!
The ages provided with these stages are just estimates—when each individual begins each stage varies quite a bit depending on individual circumstances, but the guiding principles are the same regardless. Each of these stages is discussed in detail in the sections that follow.
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 a first car, an expensive video game, or the newest iPhone. All of these purchases have something in common: They're things we want—not things we need.
This stage gives us a little leeway to make a few mistakes and spend any extra cash we might have on things adults might find frivolous. It's a safe zone of sorts, during which our parents may be able to pick us up if we fall, and we don't have quite enough resources to fall too hard in the first place
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 the things they can call their own. This helps them develop a sense of responsibility and the value of money.
Sure, you could buy that $6 coffee drink, but that takes money away from that new pair of jeans or your 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 staying 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,
- how and/or when to use credit, and
- how to make and stay on a budget.
Starting an Emergency Fund
I only learned one usable thing in my high school Physics class: Murphy's Law. Simply put, Murphy's Law states that 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.
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, unexpected expenses might be more difficult to deal with.
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, it's ideal to save 3–6 months' worth of income for emergencies. This number obviously increases as your income increases.
Building Credit as Early as Possible
One of the most important and easiest steps you can take for your financial future is to start building your credit score. 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 to look into all your options to find the perfect fit for you. Your first account will likely be a secured credit card, which requires a minimum deposit that you spend against.
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 credit and even scoring deals and rewards, 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.
Stage 2: Money Management in Young Adulthood
Adulthood is a scary time. You're just out of the nest, and you're just starting to strengthen your wings. Yet, it's also invigorating. The choices you make are yours, and the world is yours to conquer. This stage in the financial life cycle is full of tough decisions that will follow you for the rest of your life.
Pursuing 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, this isn't the right option.
The truth is that, for many people, an associate's degree or a trade school course is a much better option than going into mounds of debt for a bachelor's degree. For others, a certification or a few extra classes will do the trick. The point is to set yourself apart from other job candidates and gain marketable skills.
Beginning a Career
By this stage, you've likely had several jobs that bought you that first car or helped you get through college; it's equally likely that you didn't enjoy them. Now is your chance to change all that and to begin a career—not a job.
There are so many different avenues to take, and what you choose should depend on your individual interests, skills, and educational background. The most important thing about choosing a career is finding something you love that will allow you to support the way you want to live. Balance is an essential element here.
Starting a Retirement Fund
You just finished college and landed that dream(ish) job that will lead to the growth of your career over time. Interest is a beautiful thing. The earlier you begin to save, the faster it grows. It is entirely possible to become a millionaire just by saving $100 a month, and the earlier you invest, the sooner it can happen. That boils down to lattes and pizza money for most of us. All you need is dedication and a bit of investing knowledge to start.
Stage 3: Budgeting for a Family
Family means different things to different people. For some, it might be a spouse and a house full of kids. For others, it might mean taking care of the family you came from. Regardless of what it means to you, entering this phase of the financial life cycle brings significant changes.
Facing the Responsibility of Financial Independence
You started this journey while entering adulthood, but by making the commitment to start a family, you've solidified the decision to gain financial independence. In fact, other people may now be financially dependent on you.
You're not on your own anymore—you have others to think about. If it hasn't hit home yet, 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, and now it's time for you to help others.
Managing Money While Married
Two can't always live as 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, you'll find that living with a spouse can be very different from 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 to know about the other person. However, there are a few key financial issues that need to be sorted out before you tie the knot. Here are a few important questions to ask your partner before deciding to get married:
- When and how would you like to retire?
- Do you want kids and are we going to pay for their college?
- How often do you want to be able to go on vacation?
Saving for Children's Education
If you do decide to have children, you have an important decision to make: Are you going to pay for their college? There is no right or wrong answer, but if you choose "yes," then it is vital to start saving as soon as possible.
Stage 4: Preparing for Retirement
Retirement is a word, and like anything else, it's even scarier if you haven't planned for it. Ideally, you started saving for retirement little by little when you got your first "real" job. This isn't always possible, but once you're a full-fledged adult with a family, you definitely need to start thinking more seriously about retirement.
Deciding What Retirement Means for You
For some people, retirement means golf, rest, and relaxation. Others want to give back to their community by volunteering or travel the world with their newfound free time. There is no wrong answer, but it's important to decide what you want your retirement to look like, especially if you're married.
Having a plan and defined goals after will make you feel much more secure in your future. Here are some examples of realistic retirement goals:
- Visit London during your first year of retirement
- Volunteer at an animal shelter two days a week
- Research and publish your family genealogy
- Move into a cheaper place then travel twice a year within the country using the money you have saved
Stage 5: Enjoying Retirement
Once you're fully retired, you'll likely be relying almost entirely on social security and savings from when you were employed. This means that your money is only moving in one direction, so it's important to manage your finances carefully while enjoying your newfound freedom.
Cutting Down on Expenses
With a limited income, it's important to manage your expenses carefully. You should enjoy your retirement first and foremost, but you need to 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, and cut out anything that isn't an important part of your retirement lifestyle.
More than just a buzzword, sustainability is an important concept when it comes to making the most of the money you've earned. This can mean a lot of things—tending a vegetable garden, switching to reusable napkins, or buying used clothes, to name a few—but they all help keep the planet green and your wallet fat.
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 are wealth protection, wealth accumulation, and wealth distribution.
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 protective 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. This usually overlaps with 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, wealth distribution is designed to be the calmest and most rewarding stage of wealth management. Make your plans and then relax a little!
- 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