In order to develop a sound long-term financial strategy, it’s important to recognize that your finances are likely to be constantly changing. Not only do financial markets fluctuate, but your financial needs also change over time. Luckily, it can be 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
|Develop financial habits
|Stage Two||Family grows
|More home purchases
Accumulation of wealth
Funding college educations
Death of spouse
|Greater tax sensitivity
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 level. Developing sound financial habits is critical. Here are some issues to consider:
- Learn how you are spending your money, so you can identify ways to save. Prepare a household budget.
- Use a wise borrowing strategy. Borrow only for things that provide long-term value. Control the use of credit cards.
- Establish a saving pattern. Consider an automatic savings program so that some money is deposited into a savings account each paycheck.
- 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.
- Make sure you have adequate insurance.
- 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 your expenses. Nicer homes, nicer cars, and growing children can easily consume your increasing income. This is also the time when the financial decisions you make can 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.
- 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.
- 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.
- 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.
- 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.
- 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, financial issues should still be addressed.
- Be sure your medical insurance is adequate. The cost of medical care continues to rise, and we are living longer on average. Medicare, Medicaid and private health insurance will all be important.
- 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.
- Continue to manage your investments carefully. If you are using an advisor or stockbroker, be sure to fully understand their recommendations before accepting them.
The information contained herein may not represent the views and opinions of Nevada State Bank or its affiliates. It is presented for general informational purposes only and does not constitute tax, legal or business advice.
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