You’ve probably experienced monthly or yearly fluctuations in your budgeting and spending (or a weekly one; hey, inflation). At times it may seem like you’re just hanging on for dear life. But if you think long term and big picture about your financial well-being, there exists a general structure to help you earn, save, and spend in line with your goals.
So what are the phases of financial planning, and why do you need to understand them?
The three phases of personal finance
The three phases of personal finance are wealth accumulation, wealth preservation, and wealth distribution.
Phase 1: Build/accumulate
In the accumulation phase, your focus is on building and growing. This is where you earn, save, and plan for the future. It’s important to think about your long-term financial goals early and often and develop a plan for accumulation accordingly. For example, do you want to buy a home? Save for your kids’ education? Retire early? Travel often?
“I tell clients to think in terms of financial or life goals, be really clear about what you want to accomplish, come up with realistic plan, and implement it,” says Andrea Brashears-Lusk, a Maryland-based certified financial planner and president and founder of Wise Financial Counsel.
This phase is also where you set yourself up for success in protecting your assets and anyone who depends on them, whether that’s through estate planning or purchasing life and disability insurance.
“If I’m in the accumulation phase, my human capital is super important,” says Michelle Petrowski, an Arizona-based certified financial planner and founder of Being in Abundance. “For someone who is younger, you want to make sure you have appropriate risk management.”
Phase 2: Transition/preserve
Your second phase involves some additional assessment — of your values, goals, and the financial planning work you’ve done so far. You’ll start thinking a lot more about retirement planning and what you’ll need when you’re no longer working. You’ll also want to consider your investment strategy, your current and desired risk level, and any possible changes in your assets (upgrading or downsizing your home, for example).
Phase 3: Distribute/deploy
The final phase of financial planning is most likely to occur in retirement, when you’re no longer earning a paycheck. In distribution and deployment, you’re withdrawing from your savings, which means you need to consider the tax impacts when you do so. You may also focus on your legacy, whether that’s making financial gifts to organisations you care about or leaving something for your children and grandchildren.
Why your personal finance phase matters (sort of)
Knowing which phase you’re in can help you plan and prioritise your earning, saving, investing, and spending. However, while the three phases listed offer one way to structure your financial planning, it’s important to note that they aren’t necessarily discrete.
For example, retirement may be “more of a gradual shift,” says Petrowski. Some people may leave the corporate world around retirement age and start their own business. A layoff or the blending of a family could shift someone back into accumulation from transition and preservation.
Similarly, Brashears-Lusk considers preservation to be critical across the financial lifespan to protect your assets even as you’re still accumulating and growing and preparing to pass wealth on.
“I think preservation is really a part of each phase, but at the tail end, you’re looking at how to continue your legacy and have your money outlive you,” Brashears-Lusk says.
How you know which financial phase you’re in
The three phases of financial planning may be loosely correlated to age and stage, but it’s important to note that many additional factors — including values, goals, and major life events — also affect where you stand.
“You can identify which stage you’re in based on your goals and the life events taking place,” says Brashears-Lusk. “It’s not necessarily dependent on age, but there’s a strong relationship.”
Your existing financial foundation, including generational wealth, can also change how you navigate the phases. “When you have access to different financial resources from the beginning, it gives you a jump start over someone building from zero or starting off with a negative,” she says.
Petrowski says she asks clients to clarify their values to inform their goals and plans. This can also help you understand which phase you’re in. For example, valuing family may mean having children, or it could mean taking a trip with your siblings every year. Or your values could shift from career success and spending to peace of mind and saving following a layoff.
“It goes back to values and what’s important to them,” she says. “It’s not one and done.”