Cambridge's 10 Stages of the Financial Life-Cycle


The Cambridge Life-Cycle divides our life into ten typical financial stages that most of us go through. There are specific strategies that apply to each stage and definite markers that delineate the end of one stage and the beginning of the next. While I will refer to general age ranges, there is a wide variance in ages at which individuals pass through these stages, so don't start thinking that you are hopeless if you re not in the stage that others are in at an earlier age. Also, don't start gloating if you are in a more advanced stage for your age because frequently individuals who are more advanced at one stage end up falling behind later. "Pride cometh before the fall..."

Financial Life Cycle (PDF)

Life-Cycle Stages 1 & 2: Infancy and Early Childhood
We start at infancy then Early Childhood. During this stage we generally believe that money is to eat - and we learn that it is not a sound financial strategy (or a healthy habit) to eat money. From about 6 years old to about 12, we usually learn the relative value of money, for example that dimes are worth more than nickels even though they are littler, and that a quarter buys more than a dime. If we have financially functional parents, we will also start learning at this stage the rudiments of financial accumulation -- that it is good to save money in a piggy bank. It is worth noting that our basic belief systems about money are usually formed during this period, which we will refer to later.

Life-Cycle Stage 3: Teen Years
From about 12 to 19, the Teen years, we start learning how money makes money - that is how money earns interest, how to make money by buying something and then reselling it for a profit, and how work is rewarded with money. Often at this age, children can get sidetracked with the idea of earning their own way. Because they are not sophisticated enough to understand the cost of supporting oneself, they may think they can just go to work at McDonalds and make enough money to live happily ever after.

Life-Cycle Stage 4: Laying the Foundation
From about 20 to 30, we enter the stage we refer to as Laying the Foundation, when we start being completely self-supporting. During this stage it is key to accomplish the Five Fundamentals of Fiscal Fitness -- like buying a house, saving 10%, etc., some of which we will cover later. It is not all that unusual for some people to never really get past this stage because they basically haven't grasped the concept of what it is to be financially independent, and what it takes to get there.

There are three basic ways to get money: the first is by affiliation - you marry it, inherit it, or are given it. It's common to think that this is the easy way to wealth, but in my experience it seldom is, and money obtained this way seldom lasts because the recipient hasn't learned the basic concept of how to invest money. Thus a fool and his money are soon parted.

The second way to get money is to earn it by the sweat of your brow. While this is honorable, most people yearn to get to a point in their life where they can do what they want to do, what is self-actualizing for them, without having to worry about how much money they make.

This brings us to the third way to make money, which is what financial independence is all about, which is to let your money make money for you. This requires saving and investing enough so that at some point you have enough money so that the money your money makes will enable you to do whatever you want to do. Understanding this goal of financial independence is crucial for clients to get beyond this stage.

Life-Cycle Stage 5: Early Accumulation
At the point, usually between 30 and 40, that our net worth exceeds our annual income, we move into the Early Accumulation stage. This is where basic investment begins and we teach clients how to diversify their assets.

Life-Cycle Stage 6: Rapid Accumulation
At some point, usually between 40 and 50, when our net worth is 3 times our annual income, we reach the point at which the income from our investments exceeds our annual savings. At this point we move into the Rapid Accumulation stage and our net worth tends to increase exponentially.

Life-Cycle Stage 7: Financial Independence
Once our net worth has grown to between seven and ten times our annual income we pass on to the stage of Financial independence, usually between ages 50 and 60. At this stage we have options - the option to change jobs, or semi-retire, or have a mid-life crisis. We can use part of the income from our investments to subsidize our living expenses so that we don't have to work fulltime at a job we don't really like.

Life-Cycle Stage 8: Conservation
When our net worth is ten to fifteen times our living expenses, the earnings from pensions are usually adequate so that we don't have to work at all - we call this retirement stage the Conservation stage.

Life-Cycle Stage 9: Distribution
If we continue saving, we eventually reach the point where our net worth exceeds 15 times our annual expenses. At this juncture we are faced with the reality that we have more money than we could possible spend in our lifetime and enter the Distribution stage -- this is where we start gifting money to charities, set up endowments, and start giving it to our children.

Life-Cycle Stage 10: Sunset
The Sunset stage comes when we have less than 12 months to live, and we try to provide for the orderly distribution of the bulk of our assets.