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Financial Basics

Planning for Your Financial Life Stages

Having a sound overall financial strategy requires you to recognize that your finances are in a constant state of change. Not only do financial markets fluctuate, but your financial needs also change over time. Luckily, it is easier to predict the changes in your financial life stages than it is to predict the direction of the financial markets.

Most individuals pass through three primary financial life stages as they age. Income levels, spending patterns, family situations and areas of financial concern, while not exactly predictable, tend to follow a pattern.

Life Stage Life Events Financial Events
Stage One Enter work force
Marriage
Children
Develop financial habits
Purchase car
Purchase home
Stage Two Family grows
Career advancement
Inheritance
More home purchases
Accumulation of wealth
Funding college educations
Stage Three Major promotion
Retirement
Death of spouse
Greater tax sensitivity
Preserving wealth
Estate planning
 


Looking to simplify your finances? Learn how in Eight Steps.

Here are eight ideas to save time and reduce the stress and anxiety of managing your finances.

  1. Sign up for direct deposit. It eliminates trips to the bank and keeps your money working longer.
  2. Get overdraft protection. By linking your checking account to a line of credit, you avoid the cost, hassle and embarrassment of a bounced check.
  3. Establish an automatic savings plan. Regular, automatic transfers to a savings account add up.
  4. Use electronic bill paying. Eliminate the dreaded task of writing and mailing checks.
  5. Consolidate your financial relationships. Dealing with one institution makes everything easier.
  6. Consider personal finance software. Many programs make handling your finances quicker and easier .
  7. Build a safety cushion. Be ready for unexpected expenses or use some extra for a special vacation.
  8. Review your investments regularly. Make sure your asset allocation matches your time horizon and risk tolerance.

Stage One – Building a Financial Foundation

Young adults face the task of learning how to manage spending and saving within the constraints of their income levels. Developing sound financial habits is critical. Here are some issues to consider.

  1. Learn how you are spending your money to identify ways to save. Prepare a household budget.
  2. Use a wise borrowing strategy. Borrow for things that provide long-term value. Control the use of credit cards.
  3. Establish a saving pattern. Consider an automatic savings program so that some amount is deposited into a savings account each paycheck.
  4. Set some savings goals. Whether it is accumulating a down payment for a home, paying for a car or saving for a vacation, connecting a tangible goal with your saving can provide the motivation and discipline you need to save.
  5. Make sure you have adequate insurance.
  6. Take advantage of employee benefit plans at work.

Stage Two – During Your Prime Earning Years

This is often a time when your income is rising as well as expenses. Nicer homes, nicer cars and children can easily consume your increasing income. This is also the time when the financial decisions you make will have the greatest impact on the financial lifestyle you will enjoy during retirement. By now, you should have developed some savings and the expertise to make sound choices.

  1. Start early to save for children's college expenses. Consider using custodial accounts, Section 529 Plans or Coverdell Education Savings Accounts (Education IRAs) to get additional tax advantages with the college funds.
  2. Take full advantage of employer offered retirement plans. If you have a 401(k) plan available, contribute as much as you can or at least enough to get the full employer matching contribution.
  3. Invest wisely. Consider an asset allocation strategy that matches your time horizon and risk tolerance. Don't ignore the potential long-term returns of equities, but do your homework or rely on a qualified advisor.
  4. Be sure your insurance protection has kept pace with your needs. Having adequate life insurance to protect your family, in case of your untimely death, is critical.
  5. Prepare an estate plan to minimize taxes and to ensure that your custodial, financial and medical wishes are carried out.

Stage Three – Nearing or During Retirement

These years can and should be some of the most enjoyable and fulfilling times of your life. If children and grandchildren are part of your life, having the financial ability to help them can be rewarding. A successful career, the freedom to live the retirement lifestyle of choice and a sense of satisfaction with what you have accomplished can make your "golden" years truly enjoyable. However, there are still financial issues that should be addressed.

  1. Be sure your medical insurance is adequate. The costs of medical care continue to rise and we are living longer. Medicare, Medicaid and private health insurance will all be important.
  2. Be sure your estate plan is up to date. Changes in your financial situation, moving to a different house or state and changes in your family should all be triggers for reviewing your estate plan with a qualified estate planning attorney.
  3. Continue to manage your investments carefully. If you are using an advisor or stockbroker, be sure to fully understand their recommendations before accepting them.
  4. Enjoy life.
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