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How to Use Your Money to Prepare for Different Life Stages

Think about who you were five years ago. What about 10 years ago? Just as you grew and matured during that time, so did your financial needs. As you accumulate wealth and go through stages of life, it is imperative that you identify applicable strategies and techniques to manage your assets and reduce debt.

Generally, financial life stages fall into three categories: wealth accumulation, preservation, and distribution. An individual’s needs change through those stages of life. By understanding your savings, investment, and banking options, you will be better equipped to meet your money goals and needs during each stage.

Individuals have six basic financial service needs throughout their lifetime
Individuals have six basic financial service needs throughout their lifetime


Stage 1: accumulation

During the accumulation phase, focus on savings and liquidity — think about an emergency fund or money market. This is also the phase when you develop a credit relationship, which will allow you more flexibility in your financial future, especially when it comes time to take out a loan or get a mortgage. It's a good idea to start working with a financial planner or advisor at this time, so you can make sure you're taking a 360-degree approach to reaching your financial goals in life.

This is also the time to employ investment strategies, such as accumulating wealth in a tax-advantaged retirement account like a 401(k) or individual retirement account (IRA). This gives your money more time to grow and multiply, thanks to the time value of money: Basically, you can earn interest on your interest and continue to compound your returns. Because younger people have a longer time horizon, this is also when you will be heavily weighted in equities. Stocks' high-risk, high-return potential is well-suited to young people with plenty of time before retirement to weather any risk.


Stage 2: preservation

During this stage, it maybe wise to diversify1 your holdings to preserve your wealth. Choose an asset allocation2 (essentially, a mix of stocks and bonds) that aligns with your long-term investment strategies. In general, the more risk you are willing to take, the higher the potential for reward. 

Still, if there were to be a major market correction and market dislocation, you would not necessarily have enough time left in your life to recover from it as you did when you were 25. That is why it is so important to make sure you have enough low-risk options to cover your bases for near-term and imperative financial needs. Short-term investment strategies are completely different from long-term investment strategies. Be sure to discuss both strategies with your financial advisor to make sure you are making the right decisions for each, so you can choose the best investment strategy and make tax-smart decisions to reach your money goals.


Stage 3: distribution 

In the distribution phase, your goal should be to reduce risk. One way to do this is to draw down equity exposure (remember, equities — stocks — offer the potential for high returns at the price of high risk). By lessening your exposure to these riskier options, you can focus your portfolio on assets that might have lower potential for return but are safer. This less-aggressive approach will pad your investment accounts against risk as your time horizon shortens. 

Your path to financial freedom begins now. By preparing and planning your money-saving strategies for each stage of life, you'll be better equipped to meet your money goals at every phase.

At Cathay, we take our role in equipping you for success very seriously. Ultimately, we want to help you be in a position to leave a legacy for your family if you so choose, or for the causes you care about. We are here for you no matter what stage you're in to help you learn what strategies are most effective for saving money, how to set money goals, and how to use the right investment strategies to reach your financial life goals. We will work with you to execute a strategy tailored to you and your family's particular needs.


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This article does not constitute legal, accounting, or other professional advice. Although the information contained herein is intended to be accurate, Cathay Bank does not assume liability for loss or damage due to reliance on such information.

* Wealth management services does not assure a profit or protect against loss in a declining market.


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