Originally published 7/12/2010 at the Financial Planning Association's All Things Financial Planning Blog
Robert Schmansky, CFP(r)
Market volatility has led to concerns we may experience a lost generation of investors; a current Depression-era style generation that avoids the risks and long-term benefits of equity market investing.
I too hear that concern with prospective clients, however I find these individuals fit into more particular groups than just young people. Many who are swearing off the markets are not young at all.
This group tends to be individuals that have accumulated wealth in excess of 1-5x their annual income, placing them just past the first adult stage of their ‘Financial Life Cycle.’ As wealth takes shape, volatility becomes more noticeable, especially for those prone to certain ‘money scripts’ (more on below). Market swings of hundreds of dollars a day were one thing; in excess of several thousand dollars for many can become a nerve wracking event.
The Financial Life Cycle is an idea we use to measure the progress of our clientele, and show the path toward financial maturity. Like our biological or career cycles, the ideas in a stage are ever changing; the actions and strategies never stagnate.
Our Financial Life Cycle can tell us where we are on life’s roadmap in terms of our finances, and measure progression. The stages are not based on age, but rather we judge primarily based on one’s overall wealth or net worth relative to income.
Over the next few blogs, I will speak more about the life cycle as a roadmap to the strategies and pitfalls to watch out for during each stage.
While age does not determine where we are along the cycle, we do all start at the same place. From birth to adulthood, we become very familiar with certain money truths:
Though it is only paper, money should not be thrown out (money has value)
Your labor can be exchanged for money (earned income)
We can exchange money for things we want (money is a tool to achieve our goals)
Our time preference for using our money can lead to interest earned, or paid (budgeting and saving)
We can all grasp these basic money concepts, however more advanced financial learning largely comes from our personal observations and experiences, as well as witnessing the experiences of those we love and trust. My fellow FPA blogger Rick Kahler in his book The Financial Wisdom of Ebenezer Scrooge calls these ideas our ‘money scripts’ – our internalized beliefs and behaviors past the basic truths we all accept about money.
Personal finance is not often taught in our schools, and certainly not the degree of the different life cycle stages. It is easy for many to stop developing at various stages and miss out on habits that lead to true wealth. Becoming aware of both your money scripts and the life cycle are critical to maturing past financial infancy in an effective way.
If you are like many that are considering reacting to today’s economy based on your emotional scripts, consider spending time for introspection and learning before making drastic changes to your plan. While it is said that “money can not buy happiness,” having a sound relationship with your money based on understanding your tendencies and how you are progressing will lead to a more content life. In my next blog I will cover the first adult life cycle stage of self-sufficiency, where we need to begin to understand and work with our money beliefs in order to move toward a sound financial future.