Forward View
The Four Stages of Wealth
Over the past thirty years, I've seen almost everything. I've seen entrepreneurs succeed... and fail. I've seen fraud. Bankruptcy. I've also seen dynastic wealth and people who have done well at life.

All of these conversations have given me the benefit of other people's experiences.

After having thousands of these conversations, certain patterns seem to emerge. The Four Stages of Wealth is one of those patterns. Almost everybody seems to go through this sequence in their financial lifetime, but not everyone gets through all the stages.

Stage One: Managing Debt

This is what happens when you graduate and first head out on your own. It's about figuring things out and making a few mistakes. At this stage, you might take out a few loans to just get started in the world. Student loans, your first car, maybe an engagement ring. And then life surprises you, resulting in more debt.

When: 20's through early 30's
Strategies: Pay off debt, minimize expenses, focus on growing your income.
Risks: Giving-up or stalling on your career advancement.

Stage Two: Building a Nest Egg

This is when people first "find their groove". They have enough money to pay the bills, and life seems a little more certain - at least for a while.

When: 20's through 40's
Strategies: Save money systematically. Take advantage of tax-favored plans such as IRA's and 401k's.
Risks: Getting too comfortable and spending what you earn.

Stage Three: Gaining Confidence

Building wealth is a combination of having good habits over time. At some point, your portfolio should be growing faster than the money that you are putting into it.

When: 50's and 60's
Strategies: Focus on managing your portfolio and keeping your taxes down
Risks: Fear of losing what you've built, resulting in money not working hard enough.

Stage Four: Becoming Truly Independent

This could mean retirement, or just living life on your own terms. Either way, you get to call the shots.

When: 50's, or 60's, or 70's
Strategies: Put together your "bucket list" and fulfill the promises that you've made for yourself and your family.
Risks: Working too long, not being able to "change gears". Getting stuck in habits.

Here's my big insight: Wealth is about having enough. This can involve two things: 1) Having More and/or 2) Needing Less. It is easy to focus on the whole wealth accumulation thing. However, there is a certain amount of simplicity and freedom involved in needing less.

Also, people seem to have either too much time (and not enough resources), or they have enough money (but not the time to enjoy it). And, there are also people in the middle who don't have time or resources.

Being too focused on money can result in some expensive trade-offs... for both personal health and relationships.

It is really about balance. We almost all want three things: health, wealth, and happiness. Financial planning can help give you a sense of knowing "when" is "enough".

Jim Lee, CFA, CMT, CFP
Founder, StratFI
Disclosure: Information contained herein is for educational purposes only and is not to be considered a recommendation to buy or sell any security or investment advice. Securities listed herein are for illustrative purposes only and are not to be considered a recommendation. The author may personally hold positions in securities mentioned.

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