Shakespeare’s famous “All the world’s a stage" speech poetically and pithily captures the human journey from infancy to the “second childishness and mere oblivion” of senility and death, with stops along the way at school, in the lover’s bed, as a soldier on the front line, as a justice in the lawcourts, and as a slipper-wearing old fool.
None of the ages is perfect, though the late middle section seems to be about the most enjoyable, with its “wise saws” and full belly. The seven ages portrayed still have great resonance today and it is interesting to me as a financial adviser - who helps individuals at all stages of their life - how Shakespeare's 7 stages of man relates to our constantly changing financial circumstances and needs.
The journey of reaching our financial goals is not achieved in a single step, but through graduating through smaller stages (or stepping stones) until we achieve the financial freedom and abundance that we are content with. It is my experience that each stage can be easily recognised by similar challenges and characteristics, yet everyone's journey and circumstances will always be completely unique.
Another interesting point is that we will always graduate through Shakespeare's 7 stages as the years roll on but when it comes to our financial lives, we can easily remain where we are or even go backwards when our plans don't go to plan.
As a reminder of the monologue, here it is recited by Benedict Cumberbatch for the BBC:
Without the same level of poetry, here is my financial translation of Shakespeare's 7 stages of man:
Stage 1: Financial Dependence
We all begin from a place of dependence on others, and for many of us this stage will run until we are in our twenties and transitioning from a young adult under our parents' care to being self-supporting. Or perhaps we hit a rough patch in life as a grown adult and need the help and aid of others to get back on our feet.
This stage can be a relatively long process as it potentially ranges from that day we received our first pocket money or pay check in our first job to being self supporting. This stage is all about becoming financially solvent, developing a healthy attitude towards spending and learning how to manage our money responsibly.
Stage 2: Financial Solvency
The first stage of financial independence is to become financially solvent. This means that you are able to support yourself on your own income without the aid of others and that you can pay your bills indefinitely should nothing go wrong.
You may have to make some sacrifices such as renting a room in a shared house or spend a couple of years climbing your way up the ladder at work before you can make ends meet with any real certainty.
Although exciting, it can also be a nervous time for us with so much financial instability. This stage is about making sure that your income exceeds your expenditure so that you can support yourself indefinitely.
Stage 3: Debt Freedom
If you have debt, you’ll probably want to get rid of it. Not all debt is created equal and some forms of debt can actually be helpful such as a mortgage. But you’ll need to seriously make plans to dump that debt that’s not getting you closer to financial independence and creating a barrier for further progress.
That definitely means getting rid of any high-interest rate debt. It certainly means clearing your name from any old, unpaid debts. It probably means dumping any consumer debt tied to depreciating assets.
This stage is often frustrating as our income comes in one day and goes the next to pay for bills and our debt. Moving out of this stage is about getting rid of any 'bad debt' to free up more disposable income so you can enjoy greater freedom and independence in your life.
Stage 4: Financial Security
A house that lasts is built on a strong foundation and the same is true for your financial longevity. You are now in a position where your bad debts are gone, your income is stable and you're managing your money well. You have disposable income and it's very easy to fritter this away without realising on unnecessary gadgets or holidays. After all, you have worked hard to get to this stage and want to be able to enjoy some of that success, but as Warren Buffett says “Do not save what is left after spending; instead spend what is left after saving.”
We can only graduate from this stage once we realise that although we have a good level of disposable income now, and are in control of our finances now, it is only a matter of 'when' not 'if' we will face challenges and financial difficulties.
Whether it is becoming ill - physically or emotionally - and being unable to work, or developing addictions such as gambling or drinking or perhaps through no fault of our own being a victim of fraud, we need to have the right arrangements and protections in place to support us through such times. It is effectively our lifeboat.
We can move on from this stage once we have built up emergency funds that should be equal to 3-6 months of our current income. We also need to take advantage of the relevant insurances that are available to us. For example, if you have a family, how will you support yourself and your children financially if your spouse dies or becomes critically ill?
It is worth noting that there may times in your life where you move back a stage but as long as its for the right reasons then there is nothing wrong with that. For example, having children can be expensive, especially if you want to send them to private school. You may also have a change of career meaning you need to take a lower income while you work your way back up the career ladder. These life events can result in having less disposable income or having to take on some more debt.
Stage 5: Financial Independence
You are now in control of your finances, have the necessary buffers and protection in place to support you through turbulent times and still have a good level of disposable income. This stage is all about wealth accumulation and moving towards financial freedom. It is another relatively long stage that can last from the peak years of your career up until your retirement.
You will be able to buy your own home, take advantage of tax efficient investment and saving wrappers and begin making some meaningful contributions to your eventual retirement. Earlier, I suggested that the most enjoyable stage of Shakespeare's 7 Stages of Man was the 5th stage, The Justice, with it's "wise saws" and "full belly" and I believe this 5th Stage of wealth is also the most enjoyable. Young enough to fully enjoy our success, sufficient resources to live an unrestrictive life in our spare time and enough security and protection to maintain our peace of mind.
Stage 6: Financial Freedom
Having accumulated enough wealth, you will be in a position to retire from work (should you wish to do so) and survive off the assets you have built up over the previous stages. You're income may not be as high as it was but you will not need to travel to work and your mortgage will likely have recently been paid off so this will help offset this drop in income. It is suggested that once we stop working, an income of 2/3rds of our final salary should be sufficient to maintain a lifestyle we will be content with.
Of course, you may be a long way of the normal age of retirement and have income from property or investments that would be sufficient. Whatever your circumstances, reaching this stage means you are able to support yourself financially without the need to work or generate new income.
This is also known colloquially as the 'dream' or 'fluff' stage where you are able to afford the things you've always dreamed of having or doing such as buying a Ferrari or taking a Round the world cruise. However, there may a trade-off with this level of financial independence that has taken us so many decades to reach, which is that while we have the financial capabilities to live the life we have always dreamed of, we may not have the physical capabilities due to old age and the resulting health complications.
Stage 7: Financial Decumulation
We spend most of our lives accumulating wealth so that we can eventually stop working and live off what we have saved. When you stop working, you will likely fall into one of the following two camps:
Camp 1. Those who try to keep every penny
Camp 2. Those who try to give away every penny
Camp 1 - One of the biggest challenges faces us once we reach this stage, and that is the question of how long will you live for? If you don't know how long you will live for then how do you know how much income you can take from your savings each year.
Another challenging question is will I be relatively healthy or will I have health problems and care needs, and if so how will you pay for that care? These questions were easier to answer when we were working but now there is no regular income and the insurance policies that protected us years ago have now matured.
Although you may have a sizeable retirement pot, if you develop health problems and need care or end up living for longer than expected, all of a sudden there is a chance you may run out of money. As such fear kicks in and you live a relatively frugal retirement.
Camp 2 - You may have a guaranteed income from your pension or have enough assets and savings to feel very secure about funding your retirement, regardless of potential health issues, care needs or living longer than expected. If this is the case your priority will fall on passing your wealth onto your children, grandchildren and other loved ones and this means trying to give away as much as possible and keep it out of the hands of the taxman.
This stage is somewhat intertwined with the previous stage but is more concerned about what you decide to do with your wealth towards the end of your life and how you want it to be passed it on once you're gone.
So there are my 7 stages of wealth, at least from my perspective. For more articles and guides please visit www.domusfinancial.co.uk.
About the Author: Alex Johnston DipFA MLIBF is an FCA authorised financial adviser at Domus Financial Services and advises clients all across the UK.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Domus Financial Services or Intrinsic cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.