Do not get alarmed to hear of me mentioning of the term " Financial Life"! We all have only one single life to live on and that is the very life you and i are 'sailling' through at this very moment. The reason behind the usage of this term is none other than to help us to observe matters differently from the norm, thus hoping to shed some light in solving real financial problems in our everyday life.
With the advent of globalization for one instance, our cost of living skyrocketed exponentially and this imposes a serious repercussion to our purchasing power. Basically, in everything that we see and hear, the value of money diminishes over time. As a result it attracts serious attention in fighting over the problem and many people in the financial fraternity have emulated the principles of austerity and thrifty in handling money related matters. With regards to this, one cannot deny to ignore the emergence of the concept " The 4 stages of Financial Life".
Stage 1: The Wealth Creation Stage
It is a period where one exposes themselves to the challenging world of seeking their preferred career prior to comfortably settling down in their later life. Numerous jobs were to have been put in test until the right one clicked, and matches the skill and ability of that individual. This is also a period where a stable income is created and a great flow of anticipation is expected in an individual that promises a potential to support them financially, going forth. This stage reckons to give 'birth' to the importance of strengthening the base of wealth creation prior to moving up to the next value chain of financial stage i.e. The Accumulation stage. Although there is no hard and fast rule, generally the duration of this stage lasts from the early age of seeking a job until at about 28.
Stage 2: The Accumulation Stage
Hopping out from the first stage into the second, one is expected to start saving their money for the unexpected financial obligation in the future. To some, the saving process would have begun in the first financial stages. Here, the importance MUST be channelled to saving their hard earned money in various financial institutions in order to use it at a later part of life, especially for financing education or for retirement usage. While saving is a popular way to accumulate wealth, it is also known as the least effective way to let wealth accumulate. Why do i say so? Primarily, it is because savings will not hedge inflation, thus will only provide a marginal real return,or in most cases a negative real return. Money saved in savings account will deteriorate over time, and the effect of inflation will tear down the value of money indiscriminately. With a little bit of risk taking, money should be put in a save investment scheme that generates an interest that hedges the ugly sight of the inflation rate.
I will deal with the types of investment one shall indulge in my next blog. Having said that, we will move on to the next stage - The Preservation Stage.
Stage 3: The Preservation Stage
As mentioned earlier, the dreadful act of the merciless inflation rate could bring down the value of our accumulated wealth, thus making us poorer and poorer, than before. A total paradigm shift in rational thinking must take place within us. Besides the correct psychological frame, one must also remote themselves from thinking of saving when talking about accumulation and preservation of wealth. Saving money means putting our money in an interest bearing instrument, regardless of the effect of the inflation. On the contrary, investment concept puts importance of saving money in an interest bearing instrument that hedges inflation rate. Investment provides potential opportunity to accumulate and preserve our wealth. Unexpected debt, lack of financial support during daunting life, medical claim and education cost are some of the causes that may be a threat to us if we fail to implement the wealth preservation activity. A sound wealth preservation excercise is a tool that upon which if not implemented, accumulated wealth will be depleted in value and disasterous consequences might befall in the later period of life. The tools that can be used in this stage will be dealt with in my next blog. Let's go to the next and final stage.
Stage 4: The Wealth Distribution Stage.
Mortals like you and me will eventually 'kick-the-bucket', and when that day comes our dependants will mourn the loss of us, who have been supporting them financially. What happens to them after our demise? Who will look after them, how will they get the money which we left (estate)? How will the children be educated and from where will the spouse get the money to support the education cost?
The wealth that we created, accumulated and preserved, MUST be passed to the rightful beneficiary. Only upon this, the 4 stages of financial life will be complete. Wills and Trusts are used in estate planning to transfer wealth to the beneficiaries. It is a tool to transfer estate to whom we wish them to inherit, thus ensuring that the wealth is passed on to a preferred beneficiary, and not to anyone whom we do not want to be in possession of it.
A holistic approach in handling matters relating to personal finance shall encompassess the 4 stages briefed above. Get to know it,understand it and embrace it so that the new landscape change will benefit you financially. Happy trying!!
