The 4 stages of the financial life cycle
After 18 years old the financial life cycle consists of four stages which coincide with the standard progress of people’s life. Each stage has different priorities and different suitable products the investor can use.
The main stages we recognize are:
- Young Professional
- Young family
- Children have left the house
Protection products vs investing
The generally accepted financial planning theory is that the first item of financial products people should buy is protection. Protection products such as health insurance, disability insurance and life insurance all come under this category. These products prevent a problem with your health or ability to earn income from becoming a total disaster. Ignore protection products and you leave yourself open to risks such as huge medical bills, losing the ability to provide for your family and/or having to rely on social benefits, family or friends.
Protection products are cheap to obtain for young professionals as the risks are low. Once the protection products are in place your next step would be to start a regular saving plan for long term goals such as your retirement. In saving for retirement time is your best friend for two reasons; first, your contribution amount will be lower the sooner you start saving. Secondly, the risks will be lower.
Most people will start a family at some point in time. The children’s well being means more responsibility for you and your partner. If you haven’t already arranged your protection products do so now. Review insurance products on a regular basis to ensure coverage is still sufficient.
By nature children are expensive, but their education is the most expensive. The best decision parents can make for the future is to start a saving plan as soon as they can. Even a small amount saved on a regular basis can turn into a respectable sum of money over time. This education fund will be vital in providing liquidity and cash flow when the children do start university so that you don’t have to change your lifestyle.
Children have left the house
It is time to intensify and refocus all available saving-capacity towards retirement planning as soon as the children have left the house. Your family has less protection needs so insurance products can be scaled down. Hopefully, your loans are reduced or paid off and you have accumulated personal savings.
Asset management is the main financial product to use during the retirement stage of the financial life cycle. Your savings require more risk control than during previous stages. Income is more important than growth. Passing down wealth to the next generation because important to think about too. Think ahead and discuss in advance with your lawyer and financial adviser. This saves a lot of hassle, costs and stress for everybody.
Have you got an adviser to help you select suitable products based on the stages of the financial life cycle? Shoreline is that partner and we look forward to working with you every step of the way.