Which Financial Phases of Life Are You In?
Every year we see spring flowers bloom and fall leaves changing colors. While we may not know exactly when the leaves will change, we can count on it every year. The same can be said for financial phases. While not always easy to predict specifics, we can find patterns if we look for them.
Annual Patterns
There is a natural ebb and flow to money habits throughout the year. For example, most of us tend to spend more around the holidays because of gifts and parties. When January hits, we take a look at our budget, set goals for the year and attempt a financial diet. Then summer rolls around and we spend on vacations or enjoying concerts and dinners with their family and friends.
Life Time Patterns
The same is true when looking at life patterns for spending and investing. When you landed that nice job out of dental school, did you spend more lavishly than the average early 20-something would or did you start maximizing your retirement contributions and focus on debt repayment? It’s important to understand your financial goals and priorities and how your spending and savings patterns influence those.
How does knowing this help?
Knowing the patterns can help you plan for the future. If flying home for the holidays with a Santa sack of gifts is your pride and joy, you can plan ahead by only eating in or cutting back on entertainment a few months in advance. If retiring at 55 is your goal, you can hold off on buying that German car until your practice debt is paid off.
What phase am I in?
Financial life phase are not necessarily tied to your age, as many people assume. The phases actually better reflect where you are in your life, which is split into three different phases: (1) build and grow, (2) transition (3) and finally, distribute and deploy. For example, a 35-year-old dedicated to an early retirement and a 59-year-old late saver are can both still in the Build and Grow phase. Assessing your stage and adjusting your plan should be an ongoing process, but you can only know the phase you are in after you articulate your goals.
Financial phase No. 1: Build and Grow
During the Build and Grow phase, decide on your long-term goals and plan for them. While exact detail is not required, you should also understand the Transition and Distributions Phases to ensure that decisions now match up with your plans in future Phases. Is saving for retirement a top priority? Work toward maximizing your 401k contributions. Or, is buying a home a priority? Then figure out a savings plan for a deposit, mortgage and other expenses that is realistic and build on it.
The build and grow phase is also about protecting your future earnings. This is a good time to look at term life insurance and create an estate plan for you and your family.
Financial phase No. 2: Transition
During the Transition phase, it’s important to understand what you’ve built during your years of saving. It’s also the time to figure out how you want to live once you decide to leave full-time employment.
If you haven’t done a budget yet, it’s critical to understand your spending so you know what you will need to live off of
It’s important to factor in possible moves – do you want to stay in your home, downsize or even upgrade? Are there any plans to buy a second home to travel to since you’ll have more time? These are factors to take into account.
It’s also critical to assess how much risk you’re taking in your portfolio – this is the time to really have a good plan for protecting your assets. If something big happens in the market, it would be terrible to lose a large amount of money and delay your plans to make this transition.
Financial phase No. 3: Distribute and Deploy
In the Distribution phase, understanding where and how you are going to pull from your assets is crucial. There are important strategies to think about and tax consequences to consider like when to start taking Social Security and whether to pull from your ROTH or Traditional retirement funds. If you are well-funded and have excess assets, thinking about how you are going to leave your legacy is also important. The beauty of it is, it’s all your choice as long as you have a good plan.
Have a Plan
No matter what financial phase you are in, planning and preparing for the next step will always yield positive results. The better you articulate your goals, for both the short and long term, the more likely it becomes you can achieve them.