Charting Your Financial Life

When I lecture on financial planning to young adults I make the point that their life is roughly divided into four quarters---you could also consider them to be four seasons.

The first quarter (roughly 18-22 years) you are generally relying on someone else for your financial needs. Someone else is paying your rent, making sure you are clothed and have food in your mouth. They are trying to make sure you are being educated. They are paying your cell phone bill.

In this spring season of your life, someone else is paying for the seeds, fertilizer and water. Your main responsibility is to grow to be a productive human being and be prepared to support yourself over the next three quarters (or seasons) of your life.

The second and third quarters (the next 40-45 years) are your working years. You have to find a means to support yourself financially. Sometime in the second quarter, most will marry. Most should be doing it early in the second quarter. Marriage is highly advantageous economically as it allows you to share expenses, divide labor and tasks. Being married is a huge benefit in financial terms. Two cannot live cheaper than one but they can live much cheaper than two singles.

Being newly married, with both individuals having incomes, is the golden age of your financial life. It is as if you are at the peak of the summer season.

Some refer to this as the DINK period---Dual Incomes, No Kids.

However, soon thereafter, little people have a habit of arriving on the scene. With them come needs. Lots of needs. Needs that have to be met with money.

That requires you to take some of your income and begin satisfying those needs just as was done for you. Children need food, clothes and other things. Over time, they need (and want) more and more. You are now not only supporting yourself but children as well.

The financial needs of children is pointed to as a big reason for the declining fertility rates around the world.

In an agrarian society, children are an asset. The labor they can contribute to a family farm or unit is much greater than the costs of having them.

This is not true in more advanced economies. Their labor is not an asset and the financial resources to support them are significantly greater than it was living on a family farm 100 years ago.

During that summer season, and into the fall season, you also begin to realize that at some point winter will come. You do not want to keep toiling in the field and laboring from sunrise to sunset. You will want to retire. You may even be forced to retire before you want to or your health may prevent you from continuing to work. You need to have a financial cushion for these contingencies.

In that last quarter of life (which very likely can be 20-25 years) you have to live off savings accumulated during your working years. In effect, you need to store some of your summer work and fall harvest for the coming winter months.

It used to be said that those in the four quarter of life had to live on a fixed income.

That was true when most retirees relied on a fixed monthly pension and Social Security in the fourth quarter of their life.

However, there are few workers in the private sector who can now expect a pension in retirement. Beyond Social Security (which is now indexed for inflation) no one is really living on a fixed income in that fourth quarter.

It is more appropriate to now state that new retirees have to live out their fourth quarter on FIXED ASSETS.

The amount that they were able to save and invest in their working years through 401(k) or IRA plans at the time of their retirement, and the income that might result from those investments, has to be enough to sustain them for the rest of their lives. For most, there will no more income coming in from their work. Their retirement years are dependent on what those fixed assets will produce after they retired.

Rising home values and a surging stock market have made those fixed assets grow for most retirees over that decade or so.

However, what does the financial life look for those in the fourth quarter look like if those fixed assets begin to decline rather than advance? 

That is another reason that everyone needs a financial cushion. Those fixed assets are not easily replaced when you are in your 70's or 80's.

Charting your financial life looks something like this if you put it in graphic form.

In the first quarter of life, someone else is taking care of your needs.

In the second and third quarter of life, you have to take care of yourself and any children that come along.

At the same time, in addition, you need to be putting enough savings away in order to support your needs in your fourth quarter---your retirement years.

People wonder why it is so hard to get ahead financially?

Think about what I just described.

During your working years, you are effectively supporting three generations with one income.

Yourself.

Your children.

Your future self.

That is a little sobering.

It would not be possible without the power of compound returns which allows small amounts to grow to enormous sums given an investment return on the savings and enough time.

Credit: https://www.financialplanningassociation.org/article/journal/MAY14-why-investors-need-understand-shape-compound-growth-curve

However, compound returns do not reveal their real power until after about 20 years of compounding.

Most people do not wake up and smell the coffee until their 40's.

At that point their runway is too short to get their retirement assets where they need to be by the time they are in the fourth quarter.

In their 40's they are also caught in the middle supporting children which may include buying another car, paying for college expenses and all the rest. 

That is why I tell young people to save until it really hurts. They typically respond that they don't have the means to do it. They say they are just getting started. They have student loan debt to pay. They will put something away in the future.

It never happens. It doesn't get easier. It gets harder.

When you are young and single, you are only taking care of yourself. It won't be long until you realize what it is like to really be caught in the middle.

Here is a graphic that really captures what it is like to be caught in the middle. This is a chart I saw in ValueWalk  a few years ago that provides a data visualization of the U.S. population sorted by current status in the labor force.

Red are those not in the labor force.

Yellow are those unemployed.

Purple are those who are employed outside of the Armed Forces.

Credit: Jeff Desjardins, Visual Capitalist

This really makes the point about how those who are working in the second and third quarters of their life are really caught in the middle. The workers are surrounded on all sides---by children on the left hand side, by seniors on the right hand side and by those not working on top of them. They are paying for their kids, for their future retirement and, at the same time, a healthy amount of taxes to support those who are not working in the economy for some reason. Oh yes, they also are working to support themselves.

Everyone needs to eat. They need a roof over their head. They need health care. It falls to those in the middle of that graph to provide it all in our economy. It is probably appropriate that the color of the working employed is purple in that chart. They deserve a purple heart for their efforts.

Looking at all of this is why I typically counsel young married couples to save at least 50% of what they make. Ideally, they should be saving all of what the higher income spouse earns and live off of the income of the lower income spouse.

Not many take my advice but the reality is that they will never have a better time to save. Once children come along it gets much more difficult to save and as time goes on the advantages of compounding are not as advantageous.

Speaking of marriage, here is another data visualization of the marital status of Americans visualized by age.

Credit: Jeff Desjardins, Visual Capitalist

You can see from the chart that it is between the ages of 25 and 33 that most Americans are getting married. Marital status peaks between the ages of 45 and 55.

You know the old saying, "Make hay while the sun is shining".

It is also true when it comes to your financial life.

For most, that is going to be before children are born or after they are no longer living in their parent's basement.

However, a dollar saved early compounds over many periods. One saved late does not have the same leverage. That is why you should start early and you need to save the most when you are young. It is the easiest time to start turning The Wealth Wheel to your advantage.

Keep this lesson in my mind in considering your own financial life or use it to point a child or grandchild in the right direction for charting their financial life.