Chapter 11 - Transitions

Financial Planning Guide

Whether you like it or not, money affects your life from the moment you enter this world. The first thing you do is run up a hefty medical bill.

The Beginning

Some come into the world with a silver spoon in their mouth. The majority of the planet’s population is born in poverty. Most of you reading this book were probably born into working class or middle class families. Money meant little to you other than the rich kids had nicer stuff than you. You went to school and then in your early teens you really started to want your own money. So off you went and got a paper route and then a part time job. When that magic first pay check comes it is usually spent in minutes. Kids are so easy to market to; their initial impulse is to spend their money immediately if possible on the first consumer item they see. Marketers know that and are unconscionable about encouraging impulse buyers. So hopefully parents step in to begin the process of teaching their child how to manage money. Depending on the dynamic of the parent-child relationship, the child is either assimilated into a culture of saving, investing and value spending or rebels and spends every cent immediately on stuff. Of course there is every dynamic in between.

You then head off to post secondary school or start to work. I highly recommend that you go to school. You will always learn something. You can learn a marketable skill. You can learn about how the world runs and then you will have a clearer idea of how you fit into the bigger picture. At the very least, you learn how to learn.

The early years

Life is going good. Everybody starts paring up. You find a partner. You have your career or a nice little business. There are so many lifestyles to choose from. You can choose one that is free and unencumbered. You can spend your income on playing and dining out and having a fun life style. There are the wild ones. And there are the sedate ones where you work hard and your pleasures are in books or music or travel. You can have the city lifestyle or the country lifestyle. You can be extravagant or humble.

Most financial planners or therapists will try to get you to start thinking about your financial life now in these early years. For the most part they are unsuccessful. The fact that most people’s retirement plan includes winning at least a small lottery means that they do not think of their financial life nearly early enough. From our analysis of compound interest, you now know that you have to start something here in the early years. If you have not begun by the age of 30 you are doing yourself a great disservice.

The first nest egg

After some good mentoring or after engaging in a lot of bad judgement you learn what a budget is. You learn to spend less out than you have coming in. You learn to be disciplined and stick with your budget plan. You start saving. You add some to your savings every month. Compound interest starts having an effect. Another way you save is that once the bank sees that you have some assets, some of your banking fees start getting reduced or some services are offered for free.

You can buy many consumer items with cash, thus avoiding finance charges. You are able to borrow money for bigger items or investments because you now have collateral. You may buy your first house and have a mortgage.

For a long time, I thought that the age of 24 to 26 would be a great age to be if you got to stay one age. You are young and just starting out. Life is exciting and the world is your apple. You have income and you are relatively free of responsibility.

Mid life

As I get older I realize that each and every age has good things about it and that you would not want to be stuck at one age. Even mid-life has some redeeming factors. Most people have engaged in enough bad judgement by this age that they are starting to get wiser. As wisdom increases, your assets and net worth should be growing as well. You have risen with a few windfalls and bits of good luck in life. You have made some good choices and life has rewarded you. You have also had some bad things happen. You have had some losses and defeats. You are now the old guy saying “If you’re so damn smart, why ain’t you rich?” to the young guys. You have “bin der done dat”.

You are loaded with responsibility. You have a career or a business with employees. You probably have a life partner, a business partner or both. You may have an ex-partner or two. You may have some kids. You have bills. You have debts. You have assets. And your days are full. You don’t even have time to wonder what happened to those days when you wanted a fuller life because you were tired of just hanging around.

You have power. You got it because now you know a little of how life works. You put in your time and learned your job so now you are running things. You have steady income and assets so the bank respects you and helps you make your net worth grow. You have learned how to deal with bad things that can happen to you. You have learned how to control your emotions and remain poised in difficult situations. You have learned how to capture the proceeds of positive financial events in your life and not to squander them. You know that when you wake up tomorrow, usually it will be normal, but you are ready if something really good or something bad happens. Mid-life is good.

Empty nesting

There is a time just as you are winding up your working life where you get back to that time where life seems to get a lot simpler. For those who raised kids, they have grown up and been educated and moved out of the house. Even if you did not have kids there is this stage where responsibilities that you have carried for 2 or 3 decades are finally over. It may be that you downsize your house because you just do not want a house and yard that big any more. A lot of people pay off their mortgages at this point in their lives by either downsizing or just paying them off. All the cash flow that went into the house and kids and educations is now freed up. This is a time when a lot of people are able save a much higher percentage of their incomes to set up their retirements. If you did not start early in life saving for retirement, this is catch-up time.

If you need to save lots, there should still be lots of time and money left over to enjoy the things that you have been waiting to be free to do during mid-life. You should also remember to balance this with your need to do your final saving as you head into your twilight years. This is your last chance.

Retirement and old age

A lot of people have the image that retirement is just coasting. They think that they will never work again and just enjoy the sunshine and golf. If you have done that well, you are amazing. Some have more cash flow than they have ever had in their lives. Good for you if you are one of these people. You have obviously done it right. However, you will soon find that good and bad things can still happen to you and your finances. Economic conditions change and investments that you thought were secure are sometimes affected negatively. Frauds target the retired and the elderly. You may find yourself bored and therefore risking your savings unnecessarily. Illness and medical bills can eat your savings. Inflation can erode your buying power of your pensions. I am afraid that you just cannot go to sleep and think that everything is taken care of. You will find that you will always need to monitor and manage your financial resources. As you get into old age, hopefully you will have someone to watch over your finances that you can trust so that your final wishes can and will be followed.

Summary: this goes through stages of life and the corresponding financial evolution that you should go through to meet the demand of each step in your life development.