What's my Financial Life Cycle

Through answers given over your real situation you will elaborate a profile that will determine the acceptable risk level, in what stage are you in the financial life cycle, and about the correct size of your portfolio. For instance if you are in your twenties, single holding an MBA with an increasing income , and no one to support means you can deal with more risky situations than if you were in the same situation, but  married with 3 little children. The same happens to a widow that entirely depends on the earnings coming from low risk investments in relation to what kind of investment to choose, and compared to a 65 year-old wealthy man that besides having some investments counts with other incomes. One’s age. Income and real value generally guide us to elaborate an investment plan.

Generally, age will determine in which of the following three financial life-cycle stages do you belong to:

  • Accumulation stage: During the first years of career when your incomes tend to increase you accumulated investments mostly in the form of pension, and retirement plan. Generally, the amount of debits increase due to mortgages, loans to buy cars or others; nevertheless within this stage you also gain debts in order to accumulate assets that in time will be paid off. In this stage the focus is trying to increase your capital. 
  • Preservation stage: In this stage your invested assets are starting to grow, and generally your incomes will exceed your expenses. Here the investment emphasis includes not only capital, but how to generate incomes.
  • Prosperity stage fade away: This stage starts with the retirement stage in which the pension (retirement plan), social security and investments replace salary. In this stage priorities are focused on making your investments last throughout the whole retirement stage, and to keep having a comfortable life style. This stage mainly  emphasizes the need to preserve capital and generating earnings, but to improve life expectancy one should divert some of the investments to increase capital.

In conclusion, the key to reach an accumulative wealth doubles: Save and invest intelligently your money. This is generally true while young due to the compound rates effect that provides a major appraisal during longer periods of time.

Compound interests could be defined as the sum of all interests to capital during the previous and current periods in order to calculate interests for the next period.

Your personal current situation will generally determine the risk level you may take on in choosing a certain type of investment. Usually, young investors can afford a higher risk level due to a longer –at least 20 years- life expectancy, or more until retirement.