When developing and implementing a financial plan, it is important to consider where you are in life. The three main life phases that can be used as a guide in the financial planning process include asset accumulation, capital appreciation and capital distribution.
It’s important to note that every financial plan is a unique as the individual creating it. We all have different goals, expectations and experiences, thus it’s important to take that into consideration when determining what life phase you are currently in and when you can expect to move to the next. As we progress through these phases your financial plan’s focus and objectives should too.
The asset accumulation phase can be described as the time in your life when you are most likely focused on purchasing a variety of different assets. Usually, people in their 20’s through their 40’s are buying houses, investing in their education and increasing their earnings through promotions and other career moves.
Towards the end of this phase, the accumulation of savings and investments should be a major priority. Ensure that your monthly fixed expenses, such as mortgage and vehicle loan payments, are not so high that it undermines your ability to save a little cash every paycheck.
In many cases the rapid growth in the accumulation of assets begins to significantly slow as we enter the capital appreciation stage. The transition to this new phase can be expected to occur as early as the mid 30‘s through the late 40‘s. At this point in our lives, our careers have matured and supporting a growing family becomes the main focus of our efforts.
Financially we should begin to focus on paying off the debt we accumulated and growing our investments through capital appreciation (increases in the value or market price of the asset). During this time the returns gained through investing will determine when and how you will be able to retire.
After the accumulation and appreciation phase, we then move into the capital distribution phase of our lives, other wise known as retirement, around our early to mid 60’s. A few years leading up to this point it’s wise to begin to reallocate higher risk assets, such as stocks, into low risk assets such as bonds. This will help ensure you do not run out of money during retirement.
During the capital distribution phase many begin to rely on their personal assets, such as savings and social security benefits, to support them financially. In addition to distributing your assets for income purposes, you may also begin to gift additional assets to family members as part of an estate plan.
Understanding the three life phases, asset accumulation, capital appreciation and capital distribution will help you develop your financial plan.