Life Cycle Stages

There are four stages in the financial life cycle of an individual. The accumulation, saving, pre-retirement and retirement stages. Judging from the financial ratios of Winston and Yvonne, we concluded that Winston and Yvonne are in stage 2: the savings stage of the financial life cycle phase. This stage of the life cycle is usually characterized by the increase of assets, net worth and the decline in the use of debts, as by this stage Winston and Yvonne have already accumulated more assets over the years and would seek to protect their wealth and priorities and at the same time seek to be more risk adverse than before. People in this stage are usually concerned in saving for the future like children’s education, retirement etc. As the savings Ratio can be easily explained by the amount of money a person saves as a percentage of their total income. The level of savings as a percentage of Winston’s and Yvonne’s income is 60.41% as calculated is expected of the couple in their mid 30s falling in this stage of the life cycle as it portrayed high savings planning for the future of their children’s education. In the savings stage of the life cycle, we could expect an increase in net worth and assets as those had been accumulated before reaching conservation phases in that cycle.

The increase in assets meant that Winston and Yvonne have a relatively high net worth as calculated at 74.51%. As Winston and Yvonne have a relatively high net worth ratio, their financial solvency is lower as most of their funds are being tied up with their fixed assets and their high net worth ratio also showed that their investments and commitments are being funded by debts and trade payables that are not proportionate. Winston and Yvonne might also face problems such as liquidity problems as their high ratio meant that they do not have immediate access to their cash. Therefore any decline in value of their investments or in any aspect that is relevant to their assets would cause them to have the inability to pay back their debt, thus lead to bankruptcy. Winston and Yvonne should seek to lower their net worth ratio by diversifying their funds in lesser fixed assets like property, home contents and education funds as lowering the ratio of their net worth would help them have more financial flexibility and ability to meet their financial payment obligations.

As Winston and Yvonne are in their wealth protection phase, we explained that there would be an indication of a high net worth and a decrease in the use of debts. The debt Service ratio is the monthly debt commitments in comparison to total income and expressed in a percentage. In other words it is the ratio of the ability to repay loans over a period of time. If a debt service ratio is too high it would mean that one is too highly leveraged and has a high amount of loan and in the long run might run into difficulties in repaying off the loan commitment in the future. In this stage we expected financial prudence and a high risk adversity. The low debt service ratio of Winston and Yvonne at 14.21% indicated the low dependability on debt and increases their ability to service their debt, reducing the risk of them not being able to continue going in the long run. This could be expected of them as they are seeking to save for the future and make sure that they are able to service their liabilities in the long run and not exhausted halfway through by limiting their commitments and slowly getting a debt free approach when it comes to their retirement.

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