Financial planning theory suggests that the balance sheet applies to three different phases of life. A balance sheet shows what somebody owns and owes and usually has two sides: assets (cash, a bond, pension fund, car) and liabilities (debts, obligations). The equity is the difference between the value of your assets and the value of your liabilities and each side should match the other. If your assets are less than the money you spend, a review of your financial situation is necessary.
1. Asset accumulation
This first phase covers your 20s and early 30s when you are full of energy and starting to earn. Accumulating wealth means you are beginning to think about saving for your future. Many people start a family and purchase a house and car; however, their liabilities also increase. Many of those who buy expensive houses and cars take out loans; what’s more, you may have expenditure on education and holidays.
2. Capital appreciation
This life segment occurs between your mid 30s and late 40s. By now, many people have reached a stage where they specialise in a subject and may be at the peak of their career with a sizeable salary.
This is the right time to contemplate paying off your liabilities; by clearing a number of debts, you will be closer to living debt-free. On the positive side, assets bought during the last phase are now increasing in value and are likely to grow over time. The right asset is going to pay dividends; the wrong asset will cost you funds.
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A Forbes article investigates finances for different life stages.
3. Capital distribution
The last phase sees people retiring and starting to enjoy incoming money from the funds set up during previous life stages. Most people in this age group are no longer accumulating wealth; instead, they are enjoying the fruits of their hard work. Indeed, many people are lucky enough to be debt-free. Assets are owned outright and loan instalments are unnecessary.
With today’s medical advances, people are living longer than ever and you may enjoy 30 years following retirement; therefore, astute financial planning is paramount. A qualified financial advisor can supply a plan to navigate this and all life stages.