We discussed saving money in the first installment of this #FinanceFriday series, but we didn’t cover the financial life cycle.
The financial life cycle describes how we should approach our finances throughout our lives to prepare of retirement. The cycle includes three stages:
- Period of Accumulation: early adulthood to 50s. During this period, you should be saving for long-term goals like retirement.
- Period of Preservation: 50s to retirement. During this period, you should try not to lose money.
- Period of Depletion: after retirement. During this last stage of you financial life cycle, you should be be using the money you’ve saved for retirement to cover your needs.
The way you invest and what you invest in should reflect the goals you have for the money gained from the investments.
- Short-term: Short-term (1-3 year range) financial goals include an Emergency Fund or a purchase that you expect to make soon like a car, house, etc. An Emergency Fund includes 3-6 months worth of expenses depending on the stability of your income. Example: If you’ve been a state employee for several years, you probably have a stable income and could manage to have only 3 months worth of expenses in your Emergency Fund. If you work in sales and your income is commission based, you may need to have 6 months worth of expenses saved in your Emergency Fund.
- Short-term Investments: Some investments that give a return quicker than other investments include: Money Market Accounts, Short-term Certificates of Deposit (CDs), and Short-term Bonds
- Long-term: Long-term financial goals may include education, retirement, and end of life care.
- Long-term Investments: Some investments that you are meant to invest in for years and not expect a large return in a short time frame include: Long-term CDs, Long-term Bonds, Real Estate, and Stocks. Stocks are a favorite investment choice for long-term goals due to the growth opportunity of the market.
Most of NsideMyBox readers are within the period of accumulation of their financial life cycle. In 3 Steps to Become Financially Healthy, we discuss the importance of budgeting. It is extremely important to budget and know where your money is coming from, how much you earn after taxes on a monthly basis, how you spend money, where is the majority of your earned income going, if you’re living paycheck-to-paycheck and if you are going into debt each month. Knowing the trends you have with how you spend money gives you insight on what you prioritize. It also lets you know what you could be spending less on to increase your savings. Research suggests that you should be saving 16.6% of your income every year for 30 years for retirement; I suggest to adjust that percentage according to your expenses and lifestyle. If you give the church 10%, you can give your savings 10% as well.
Living within your means is a #MajorKey (shout out to DJ Khaled and ASAHD). There is a difference between having money to pay for something and being able to afford it. Being able to afford something means after you’ve purchased that item, you are not struggling to pay for other things or will have the income needed for upkeep or other expenses that will come with that purchase. Budgeting will let you know what you can afford on a monthly basis and what you cannot.
I love talking about financial planning and what we can do now to set up a better financial future. Comment below if you have any questions. See you next #FinanceFriday!