Knowing which of the financial phases of life you are in can help you
better plan to build, protect and enjoy your assets, no matter what
Every year we see the same months, holidays, and seasons – it’s all
pretty predictable. While you may not know when a winter storm will
hit, you can usually count on chillier weather come winter. The same
can be said for financial phases. While not always easy to predict,
you can find patterns if you look for them.
But how does knowing a financial phase pattern help? When it comes to
financial planning, the answer is a lot.
What are financial phases?
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, people take a look at their
budget, set goals for the year, and attempt a financial diet. The same
can happen in the summer as people splash out on vacations or enjoy a
plethora of activities with their families.
Patterns can also occur throughout, showing up in spending and savings
habits. Recent college grads probably live on a tight budget with
fewer savings, whereas an established professional might be more
focused on long-term goals, such as buying a home or saving for
Is it the same for everyone?
While the year can offer similar periods of spending and saving, each
individual has their own plans, priorities, and habits that make them
unique. If you enjoy saving, maybe you take vacations during shoulder
seasons to take advantage of lower hotel and airfare prices or you
sign up for a credit card (of course, paying it off every month) that
supports your travel habit – think free rooms, reduced flights, etc.
Or if you always go big on your birthday each year, you create a plan
to automatically save money every month into a “birthday fund” so when
the time comes each year you’re ready.
The same is true when looking at life patterns or saving and
investing. If you land a well-paid job out of college, perhaps you
spend more lavishly than the average early 20-something would. Or
someone who joined the FIRE movement would contribute to their
retirement and save differently since they have a different goal. It’s
important to understand that each person has their own goals and
priorities, and sometimes life gets in the way with unexpected
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. When you know something happens annually that
you want to enjoy to the fullest and not worry about your cash flow,
you can budget it in fun ways beforehand.
For example, if you love having happy hour with friends every week,
maybe offer to host it at your house for one month. Rotate who brings
the drinks and apps each week, and what you spend in one month can
easily be equal to what you spend in one week out on the town.
Taking the time to write down important things to you, both annually
and in the bigger picture, is a great starting point. If some of these
items have regularly occurring dates, like holidays or birthdays, you
can build specific timelines around when you need to focus on saving.
Sometimes there are unplanned events, like weddings or concerts, but
you can find ways to save all year round so you have a sturdy fun fund
waiting for you when you need it. (Of course, you should only build a
fun fund after you have a solid emergency savings fund.)
What phase am I in?
The economic life phase you’re in isn’t necessarily tied to your age,
as many people assume. We’ve uncovered that the phases actually better
reflect where you are in your life, which are split into three
different phases: (1) build and grow, (2) transition (3) and finally,
distribute and deploy. For example, a 35-year-old in the FIRE movement
and a 68-year-old late saver for retirement can both be focused on
their transition into retirement.
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 this phase, decide on your long-term goals and plan for them.
Is saving for retirement a top priority? Work toward maximizing your
contributions to your 401(k) plan. (A tip I learned early on: When you
receive raises, save more and live off of the amount you were already
comfortable with.) Or, is buying a home a priority? Then figure out a
savings plan for a deposit, mortgage, and other expenses that are
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 life insurance and create an
estate plan for you and your family. I’m currently in this phase and
wanted to ensure that (as scary as it is to think about!) my husband
and boys would be OK if something were to happen to me. We bought term
life insurance for each of us and created an estate plan to dictate
what would happen if something were to happen to me or my husband.
This gave us both peace of mind.
Financial phase No. 2: Transition
During this 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. Working
with a financial adviser to do a financial goal assessment is
important to project how well you’ve saved.
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.
During this phase, 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
Financial phase No. 3: Distribute and deploy
In this 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.
If you are well-funded and have excess assets, thinking about how you
are going to leave your legacy is also important. There are many ways
to give, including charities, foundations, and personal gifts, and
these can be structured to be given while you are alive or after you
pass. The beauty of it is, that it’s all your choice as long as you
have a good 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.