A concept in personal finance says an individual’s financial journey includes 4 phases. You may go through these phases starting early adulthood until after you retire.
Learn what the stages are and how your investing decisions may evolve as you enter and exit each 1.
1. Accumulation
This typically lasts from your 20s to 30s when you start your career and begin saving and investing for the future.
At this stage, you’re just starting out and working to accumulate wealth. Your initial priorities might include creating a budget, tracking expenses, setting aside an emergency fund, and paying down any debt.
Since you likely have no dependents yet, especially at the start, this is a good time to save and invest as much as you can. This can set you up for the next stages of life, which tend to come with more responsibilities and correspondingly higher costs.
How you might invest
Your age can play a role in how you approach investing because your financial goals and risk tolerance will likely change over time.
While you’re young, you have time on your side. You might be able to take more investing risk – which tends to come with higher potential reward – since you likely won’t need your money right away.
You can ride out the ups and downs of investment markets and allow your investments to possibly grow in the long term.
To balance investing risk and reward, it’s ideal to only take as much risk as your risk profile allows.
Learn about the types of risk profile and what they mean in this article.
2. Consolidation
At this point, usually in your 40s or 50s, you’ve reached the middle of your career and are possibly earning and spending more.
You may have already accumulated a decent amount of wealth, though you still have time before reaching the traditional retirement age. The priority shifts from building to growing and protecting your assets.
How you might invest
While you may still want to grow your investments, you’re likely starting to think about retirement. To prepare, you can consider rebalancing your portfolio so that you can strike a balance between growth and stability.
You may also explore income-generating assets which can supplement your retirement fund, like bonds and dividend-paying stocks.
3. Spending
You’ll enter retirement at this stage and so your financial goals may change significantly. After spending decades building your wealth, this is the time to draw from your investments to support your post-career lifestyle.
The focus now isn’t growth but preservation. Your main concern is to manage money properly, so that it lasts you through retirement with possibly enough left to pass on to the next generation.
How you might invest
You’ll want to reduce risk so you can comfortably cover your retirement needs while still growing your money enough to fight the effects of inflation.
Retirees may choose an asset allocation with mostly conservative investments in their portfolio.
4. Gifting
If you’ve built a sizeable nest egg, you may want to pass on the remaining wealth to your heirs or chosen charities. You might also want to help your children or grandchildren with their own financial goals.
How you might invest
Your investment decisions may focus on preserving your wealth for future generations. It’s ideal to work with an expert and get your estate planning in order so that your loved ones can benefit from your wealth the way you intended.
Remember that your journey may look different from other people’s experiences because of your unique situation and life goals. The phases may overlap, and you may start and end each 1 at a different age than others would.
Understanding these phases can help you identify your priorities at present while also planning and preparing for a comfortable future.
