As people move forward in their lives, there is a tendency for the majority of us to go through different financial seasons. During these seasons, our objectives change due to changes in our financial circumstances. These seasons, or phases, can be described as the asset accumulation phase, the conservation and protection phase, and the distribution and gifting phase. Although not all people go through the seasons at the same time or even reach a particular phase, a good amount of people do go through all three phases at some point in their lives. Here is a typical timeline for each phase, along with the common objectives and concerns associated with it.
Asset Accumulation
This phase is the starting point in a financial journey. It usually begins when a person enters the workforce, between the ages of 20 to 25. The beginning of this phase is characterized by limited funds for investing, a pretty high amount of debt, and a low net worth. The debts may come from school loans, car loans, credit card debt, or all three and more. Since there aren’t a large amount of assets owned by the person, there is generally not much thought given to financial risks that exist.
But as a person progresses through this phase, more money is available for investing, the amount of debt as a proportion to their assets decreases, and their net worth rises steadily. Two of the most typical assets people want to accumulate in this phase are a car and a house. This phase usually lasts until the age of 50.
Conservation and Protection
This phase starts after the person has acquired a few assets, when the person reaches their late 30′s or 40′s. During this season, the person has further increased their net worth and decreased their proportional use of debt. Now, as people build up more assets, they usually become less tolerant of risk. Instead, they’re more concerned about losing what they’ve gained than on getting more. They’re more concerned with risks that they may not have considered during the asset accumulation phase. These include, but are not limited to, the risks of untimely death, unemployment, and long-term disability. As such, they start to consider the need to protect themselves from these risks by purchasing the relevant types of insurance.
Many people may actually still be in the asset accumulation phase as well, trying to accumulate more while trying not to lose what they’ve gained. This phase usually lasts for the entire time that the person remains in the workforce. And for some people, this phase may last for their entire lifetime.
Distribution and Gifting
This is the last of the three phases, and begins when a person has realized that they can afford to spend on things that they’ve never thought possible. Going through the two previous phases successfully makes this phase possible. For some, this phase may begin as early as the late 40′s.
Sizable investments, low debt, and a high net worth characterize this phase. People in this season begin to feel financial pressures declining, and look to enjoy their lives more. Life insurance premiums may be dropped and other deductibles may be raised. With their built-up wealth, these people may consider paying for their grandchildren’s college tuition and going on expensive vacations. They may also visit more often with an estate planner to plan the final years of their lives and the subsequent transfer of their wealth.
What About You?
As a somewhat recent college grad, I’m currently in the asset accumulation phase. But while these three phases are separate, one doesn’t have to reach the next phase first in order to begin navigating through it’s challenges. I’m not waiting until I reach a certain age before I start giving money to worthy causes. I’d like to make a difference with my money today. Similarly, in the asset accumulation phase, you can still plan for future insurance needs, or even long-term estate planning issues. Thinking about these things now can prevent some unexpected consequences from popping up in the future.
So what season are you in right now? Do you have any desire to reach the next phase? If so, what steps are you taking to make this happen?
