Life Stages

People at different stages of their life have different financial circumstances. They will probably have different amounts of money coming in (collectively called incomings or income), such as pocket money when they are a child, an allowance in their teens, earnings or benefits when they are an adult, and a pension when they are retired. How they use their money will vary throughout their life as well, depending on what they spend, save, and repay on debt. When they live at home with their parents, for example, young adults will not have financial responsibility for paying household bills. Once they have left home, they will have to pay for rent or a mortgage and other bills such as electricity, water and food.

A person’s life cycle starts when they are born and ends when they die. The details of each person’s life are different. There are stages of life, based on age, that we all travel through, however, and life events such as getting married and having children that happen to many of us.

When planning current and future finances it is useful to consider the financial circumstances that tend to apply to each life stage and the financial consequences of possible life events. Young adults may want to plan to leave home, for example, to become independent of their parents, or have an ambition to go to university. This may involve investigating sources of money coming in and possible outgoings such as paying day-to-day costs, for example mobile phone charges and saving for the future. Mature adults may plan to start a family, to buy a car or to realise an ambition such as travelling. Adults in late middle age may want to plan for their old age while offering whatever financial support they can to elderly relatives and children.

Financial services providers such as banks, and insurance companies offer products that are designed to enable people to pay for the life events that tend to happen at different life stages.

At each stage, people tend to have different:

• Life events
• Levels of income
• Levels and patterns of spending
• Amounts of savings and attitudes towards savings
• Amounts of debt held and attitudes to debt
• Family sizes and structures
• Levels of education
• Attitudes to risk (and to the future)

External Influences on the Life Cycle

The length of the various stages in the life cycle, and what happens during them, is affected by external influences including socio-economic trends. These external influences are outside the control of the individual and can impact on their life events. An example of a key external influence for personal financial planning is the interest rate, it affects the rate that financial services providers pay on savings and the amount they charge for loans. Conversely, if the bank rate is low, savers will receive extremely low returns and borrowing becomes cheaper. This has an impact on people’s ability to save for life events and whether or not they can afford to borrow money.

Social trends include demographic changes, that is, changes to population size and structure through births, deaths and migration (the movement of people to live in a different country). Social trends also include changing attitudes and habits, such as attitudes to work, marriage and debt.

Economic trends include periods when a country is producing and selling increasing amounts of goods and services. This is often termed an economic boom. It leads to a greater number of jobs being available and so to lower unemployment and a higher income per person in the country.

How Attitudes Towards Financial Risk Relate to the Life Cycle

People’s attitude to risk can be influenced by the stage they have reached in the life cycle. Certain events are more likely to happen at certain stages. For example, older people are more likely to suffer from poor health. This means that paying for health insurance may be more important to people in late middle or old age than it is to people in the young adult stage.

The consequences of risks can also be more damaging at different stages of the life cycle. Someone who loses all of their investment in a company when they are a young adult, for example, has many potential years of earnings to rebuild their savings. If the same loss happened to someone in late middle age, they would have just a few working years left to save for old age.