FINANCIAL LIFE-CYCLE

On our journey through life we tend to go through stages. The stage we find our self in will have an impact on our financial planning. Modigliani and Brumberg (1954) devised a model to explain these stages. Here is a simplified version:

1. Individual supported by parents
   • income very low
   • few financial decisions
2. Young single
   • income barely matches expenditures - no significant savings
   • financial decisions tend to be mostly short term
   • purchase car, clothes, music systems
   • budgeting is important
3. Young couple, no children
   • income greater than expenditures - some savings
   • purchase home furnishings
   • purchase home
4. Couple (or individual) with children
   • income approximately equal to expenditures
   • upgrade house
   • purchase children's toys, clothing, and supplies
   • purchase life insurance
   • college tuition expenses
   • debt management is important
5. Empty nesters
   • income greater than expenditures
   • purchase investments
   • retirement planning is important
   • tax considerations are important
6. Retired
   • income less than expenditures
   • live off of savings
   • purchase medical and nursing services
   • estate planning is important

These financial activities need not occur in the stages as described. In fact, it is beneficial to do many of them as early as you can. Estate planning, investment planning, and retirement planning should all be done as soon as possible.

Source: http://en.wikipedia.org/wiki/Personal_finance