The Ten (10) Financial Stages of Life

The Cambridge Financial Life Cycle is a benchmark which divides your life into ten typical financial stages.  There are specific wealth building strategies for each stage and financial ratios that mark the transition from one stage to the next.  The most unreliable indicator on the Financial Life Cycle is the age range.  People can spend 50 years stuck in a stage or skip it altogether.  A divorce can move people backward and commitment to a financial plan can jump them forward.  So don't be discouraged if you're "behind" and don't get too excited if you're "ahead".

Life Stages #1 & 2: Toddler & Childhood

The first two stages are Toddler (Early Childhood) and Childhood.  During the Toddler stage (0-5) we believe that money is to eat.  Our parents teach us that eating money is not a sound financial strategy (or healthy habit).  By Childhood, which we define as age 6 to 12, our parents have taught us three more financial concepts:  accumulation, convertibility and relative value.  In the old days parents taught us to accumulate when they gave us an allowance and a piggy bank in which we had to save some of the allowance.  We learned about convertibility when our parents let us spend some of our allowance to buy things.  Relative value means we learned that dimes are worth more than nickels even though dimes are smaller.

Life Stage #3: Teenage Years

During the Teenage years, from about 12 to 19, we learn three more concepts:  budgeting, earned income and how money makes money.  We learn about budgeting when our parents give us a clothing allowance and make us buy our own clothes.  We learn about earned income when we buy something, fix it up and sell it for a profit or when we babysit or mow lawns for money.  During this stage, some children get sidetracked with the idea of moving out on their own, but that seems to be occurring less frequently.

Most of our beliefs about money are acquired by the time we are 12-19 years old.  Unfortunately, some of these beliefs are dysfunctional and prevent us from achieving financial independence.  We encounter many adults stuck in the next financial stage because they have never learned about budgeting or how money makes money.  Their parents never taught them the power of compounding interest by helping them to open a savings or investment account and adding to it regularly.

Life Stage #4: Building the Foundation

During our 20s, we enter the Building the Foundation stage.  During these years we become completely self-supporting.  These are the critical years where we establish the financial habits that will determine our financial future.  We call these habits the Five Fundamentals of Fiscal Fitness.  It is not all unusual for some people to never get past this stage because they haven't grasped the goal of Financial Freedom and what it takes to get there.

There are three basic ways to acquire money: the first is by affiliation - you marry it, inherit it, or are given it. It's common to think that this is the easy way to wealth, but in our experience it seldom is.  Money obtained this way seldom lasts because the recipient hasn't learned the basic concept of how to invest money. Thus “a fool and his money are soon parted”. The second way to get money is to earn it by the sweat of your brow. While this is honorable, most people yearn to get to a point in their life where they can do what they want to do (self-actualization) without having to worry about how much money they make. The third way to acquire money is to have your money make money for you.  This means saving and investing until you have accumulated a pile of money big enough to earn more than you earn by the sweat of your brow.  When your money makes enough money to cover your living expenses you have achieved financial freedom.  Understanding this goal of financial independence is crucial for clients to get beyond the Building the Foundation stage.

Life Stage #5: Early Accumulation

At the point, usually between 30 and 40, that our net worth exceeds our annual income, we move into the Early Accumulation stage. This is where basic investment begins and we teach clients how to diversify.

Life Stage #6: Rapid Accumulation

At some point, usually between 40 and 55, when our net worth is three (3x) times our annual income; we reach the point at which the income from our investments exceeds our annual savings.  At this point we move into the Rapid Accumulation stage and our net worth tends to grow exponentially.

Life Stage #7: Financial Independence

At this point our key financial ratios change.  Instead of measuring Net Worth/Income we calculate Investment Portfolio/Living Expenses.  When our investable assets have grown to between seven and ten times (7-10x) our annual living expenses we pass into the stage of Financial Independence.  This usually occurs between ages 55 and 70.  At this stage we have options - to change jobs, semi-retire or have a mid-life crisis.  At this point we can use some of the income from our investments to subsidize our living expenses so that we don't have to work full-time at a job we don't really like.  At this point our strategic priorities also change from accumulating wealth to conserving wealth.  Not going backwards becomes more important than moving forward.

Life Stage #8: Conservation

When our investable assets are ten to fifteen times (10-15x) our living expenses, the earnings and any income from pensions are usually adequate so that we don't have to work any more.  While many call this retirement, we call it the Conservation stage.  We have arrived at our destination, so why should we risk going backwards just to accumulate a little more?  Many clients find it difficult to invest conservatively after years of pursuing a “growth” portfolio.  It seems “wasteful” to not try to get a higher investment return.

Life Stage #9: Distribution

If we continue to practice the Five Fundamentals of Fiscal Fitness, we eventually reach the point where our net worth exceeds 15 times (>15x) our annual expenses. At this juncture we have more money than we can spend in our lifetime.  We enter the Distribution stage.  At this point we “invest in memories” and ensure our financial legacy.  We gift money to children or fund a family cruise.  We may gift money to charities, set up endowments and create an estate plan that will shape the values on our descendants.

Life Stage #10: Sunset

The Sunset stage comes when we have less than 12 months to live, and we try to provide for the orderly distribution of the bulk of our assets.