The Life Cycle of Financial Plans
by
Charles Lamson
Financial planning is a dynamic process. As you move through different stages of your life, your needs and goals will change. But certain financial goals are important regardless of age. Having extra resources to fall back on in an economic downturn or period of unemployment should be a priority whether you are 25, 45, or 65. Some changes---a new job, marriage, children, moving to a new area---may be part of your original plan.
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However, more often than not, you will face unexpected "financial shocks" during your life: loss of a job, a car accident, divorce or death of a spouse, a long illness, or the need to support adult children or aging parents. With careful planning, you can get through tough times and prosper in good times. To weather life's financial storms, you need to plan ahead and take steps---for example, setting up an emergency fund or reducing monthly expenses---that will protect you and your family financially if a setback occurs.
As we move from childhood to retirement age, we traditionally go through different life stages. Exhibit 1.7 from page 20 of Personal Financial Planning by Gitman &Joehnk illustrates the various components of a typical personal financial planning life cycle as they relate to these different life stages. As we pass from one stage of maturation to the next, our patterns of income change simultaneously. From early childhood when we relied on our parents for support, to early adulthood when we held our first jobs and started our families, we can see a noticeable change in income patterns.
As we embark on our chosen career path, we replace negative income---in the form of reliance on our parents for money---with a rapidly increasing positive earnings stream. Then as we move from career development to preretirement years, our income becomes more stable. Finally, our income begins to trail off (ideally, only a bit) as we enter our retirement years. Thus, as our emphasis in life changes, so do the kinds of financial plans we need to pursue.
Brief about financial planning life cycle.
Today, many young people wait to marry and have children, first focusing on their careers and building a financial base. Mary Padgett and Tim Conners met in college and completed their graduate degrees while continuing to date. When they both found jobs, they became engaged, and after two years of working and establishing themselves with their respective firms, they got married. Neither one regrets waiting. Not only did they have a chance to really get to know one another, they were able to develop financial goals and plans that worked for both of them.
Today, new career strategies---planned and unplanned job changes, or several different careers over a lifetime, for example---are common and may require revising financial plans. The families of women who interrupt their careers to stay home with their children, whether for 6 months or 6 years, need to plan for periods of reduced income. A divorce, the death of a spouse, and remarriage can drastically change one's financial circumstances. In addition, many people in their thirties, forties, and fifties find themselves in the "sandwich generation," supporting their elderly parents, while still raising their children and paying for college. And then there are those individuals who must cope with reduced income through lost jobs due to corporate downsizing or early retirement. We will look at these and other special planning concerns in upcoming posts.
*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 19-20*
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