When you think about it, whilst you may enjoy your work and feel that you are making a difference, one other reason for fronting up each day is so that you can continue to have cashflow coming in to take care of your needs, wants, and savings now (and into the future).
Furthermore, it’s probably safe to say that you envisage the financial decisions you make throughout your working life will eventually lead you to a point where you have accumulated a sufficient amount of wealth to generate cashflow for you to not only retire, but retire comfortably.
With this in mind, in our article, ‘Ageing and health status in retirement: The three chapters’, we discussed the fact that there are different chapters that you will experience as you progress through life, for example, accumulation, transition to retirement (where applicable), and retirement.
Importantly, whilst we focused predominantly on retirement in our previous article, in this article, we take a big picture view by looking through the lens of an important financial model.
The financial lifecycle
In a nutshell, the financial lifecycle is a model that provides a simplistic framework upon which to better understand the path you travel during your life. Namely, your progression from financial dependence to independence with regards to wealth accumulation and cashflow generation.
Before proceeding further, it’s essential first to understand that when it comes to wealth accumulation and cashflow generation, cashflow can come from several different sources (either in combination or isolation from one another). For example, cashflow from employment, self-employment, business interests, and investments.
Moving forward, please see below for a helpful diagram. This diagram serves to not only highlight at a glance the main features of the financial lifecycle, but can also be used as a reference guide as you make your way through the remainder of this article (which delves further into the detail).
Phases and the financial lifecycle
The financial lifecycle has three distinct phases.
Please note: The generalisations utilised below are aimed at providing you with a broad understanding of the different phases within the financial lifecycle. As such, it’s important to remember your personal financial situation, goals and objectives may differ from the descriptions provided.
Volatility and the financial lifecycle
When viewing the abovementioned diagram, it’s important to remember that we have forgone detail for the bigger picture. For example, due to the perspective used (i.e. incorporating a person’s entire lifespan), a smooth line is shown for wealth accumulation.
Nonetheless, this smooth line is not an accurate depiction of what you may experience, as at times there will most likely be ups and downs, which will invariably bring a certain level of volatility to your wealth accumulation journey. Notably, instances of volatility may occur, for example, in the short-term, where:
When you are living a day, week or year of your life, it can be easy to get caught up in the emotional ride of the short-term moment without giving much thought towards the medium and long-term.
In instances where this is the case, you may find that taking a step back and looking at the bigger picture can be a valuable exercise. Importantly, the financial lifecycle can be helpful in this regard as it provides you with an overview of the path that you will travel during your life, from a financial perspective.
If you have any questions regarding this article, please do not hesitate to contact us.