Money for all seasons II: income, spending and age profiles and received wisdom
In ‘Money for all seasons I’ I already described the seasons of our lives according to income and spending. I also set out some expectations and used these to ask you, my readers, to position yourselves within a season. In brief, I see the expectations of pitfalls in different ‘seasons’ are the following.
In Spring you can expect:
- Low income;
- Low day-to-day expenses;
- Investment mainly in education and competencies; and
- Low or negative cash flow.
- Keep debt optimal and not borrow more than you absolutely need; and
- Move into Summer with very low or no consumer debt.
In Summer you can expect:
- Increasing income;
- Increasing expenditure;
- Relatively low cash flow; and
- Accumulation of liabilities.
- Increase cash flow;
- Minimise liabilities; and
- Enter Autumn with no consumer debt.
In Autumn you can expect:
- Lifetime highest income from variety of income streams.
- Lowest expenses.
- High cash flow.
- Aggressive and prolific investing.
…and you should:
- Invest aggressively and prolifically.
In Winter you can expect:
- Lower income mainly from pensions and investments; and
- Higher expenses mainly on medical bills and care.
…and you should:
- Ensure you have enough to live your life without becoming a liability.
Today I will use these framework to map several ideal ‘financial profiles’ and illustrate how these can be used as a simple and straight forward tool for checking on your financial health. The profiles below are just an illustration – you can map yours exactly where you using historical data (if you keep any; being a financial nerd I have records of income and expenditure going four years back – anything before that I’ll have to guess by the outcome) and projections.
Ideal financial health profile
Below is ideal financial health profile. This shows the expected cash flow for each of the seasons of life. Some may argue that the cash flow should be greater in Winter; I am a firm believer that perfect financial management means to have enough money left for a jolly pint of beer (or nice bottles of wine) of your relatives and friends after you are gone. Not one for worrying about my children’s inheritance; were I to leave inheritance it will be gold stored under my bed.
Problematic but ‘all right at the end’
This profile shows negative cash flow for most of Spring and some of Summer which means that consumer debt has been built. Given that investments in Autumn can’t be as large and aggressive as in the ideal case, this in turn means that cash flow is very precarious in late Autumn and early Winter but if sufficient control is exercised (and medical bills are kept relatively low) it is still possible to live one’s life without becoming a liability. There is not even a question about inheritance under this scenario.
The profile of despair
This profile shows consistent negative cash flow and accumulation of debt till early to mid Autumn. This means that investments are not possible which leads to what I have called ‘the point of no hope’ – this is the point where the income and expenses curves cross again in Winter. Simply put, people who have this financial profile run out of money in their Winter and either become a liability to their children or …
I would expect that most people will have a variation of the second profile. I know my profile is far from ideal but it is not the profile of despair yet. Off to do my profile and to plan how to avoid the ‘point of no hope’ – selling drugs when seventy and going to prison is not an option!
What is your financial health profile?