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Financial Literacy

What Are the 5 Stages of Investing?

Most people tend to think of investing as a two-stage process: save now, spend later. But, in fact, there are actually five stages to consider. What are the 5 stages of investing? They’re a step-by-step road map that shows exactly how saving now allows you to spend later. What happens in between plays a big role in how you save and when you can spend. It’s worth understanding the entire process, start to finish. 

Here’s a look at the five stages of investing and what the significance of each one is on your overall investing journey. Be sure to pay close attention to the takeaways at the end of each section to understand next steps and the best course of action for each phase. 

What are the 5 stages of investing to you

What Are the 5 Stages of Investing?

Stage 1: Put and Take

Put and take accounts are the most liquid form of investment. Unsurprisingly, they also have virtually no risk or reward associated with them. The best example is a savings account. When you deposit money into your savings account, it’s not invested – meaning the value won’t go up or down based on market conditions. It’s insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, which means the federal government will guarantee each account up to that amount. In the simplest terms, your money is safe.

But without risk, there’s no reward. Sure, you’ll earn interest from the bank as it uses your money – but average savings interest rates are less than half a percent. When you factor in inflation, you’re actually losing money when you keep it in the bank! So why do it? It all circles back to liquidity. That money is available immediately when you need it, whether you’re making a large purchase or paying bills. 

Takeaways

  • Put and take accounts are liquid and accessible at any time.
  • These accounts are good for guaranteed on-hand cash, not for investing.
  • Use these accounts for emergency funds. Invest anything you don’t need now.

Stage 2: Planning

Once you’ve used a put and take account to pay down debt and generate emergency savings, start thinking about how to make your money work for you. That means investing it. But that doesn’t mean buying shares of companies you like or sticking money into an index fund. It means figuring out the best mode of investment to meet your future goals. 

The planning phase involves building a bridge between where you are and where you want to be. How old are you, and when do you want to retire? This will guide the aggressiveness of your investments. What’s your risk tolerance? This will govern the types of investment vehicles you choose. How much income do you make today, and how much do you need to retire with? All these questions play a role in determining the best investment strategy. Planning forces you to sit down and put together an investment strategy – or work with someone who can do it for you. 

Takeaways

  • Satisfy all immediate financial obligations before you start investing.
  • Explore investment strategies based on your situation.
  • Establish a clear investment road map and investing thesis.

Stage 3: Accumulation

With the right investment strategy, you can put yourself on autopilot. So long as you maintain contributions to your investment accounts and have some process for rebalancing them, market forces will take care of the rest!

Some investments take more work than others to maintain. This is often why people hire investment managers or use machine-learning platforms during the accumulation stage. While a hands-off approach is typically best, it’s still important to be aware of how your investments perform and the factors driving that performance (good or bad). Sometimes that means selling an underperformer; other times, it means reallocating investments. Use a gentle hand in managing your portfolio and let the market work for however many decades you’re invested. 

Takeaways

  • Keep contributions consistent and allocate according to your thesis.
  • Stay apprised of fund performance and rebalance at set times each year.
  • Consider working with an investment advisor or management firm.

Stage 4: Distribution

After you’ve spent decades investing and earning compound interest, there comes a time to retire. When you kick off your work boots for the last time, you’ll transition from the accumulation phase to the distribution phase. For most people, this happens at age 65 – the age you become eligible for full Social Security benefits. Others may choose to retire at 60 and take partial benefits. A lucky few will retire even earlier!

Whenever you choose to retire, you’ll rely on your investments for income. That means taking distributions from retirement accounts. For IRA and 401(k) products, those are required minimum distributions (RMDs). At this point, you’ll transition from active income (earning) to fixed income from investments. You’ll have a finite amount of wealth – as much as you’ve saved over the years. It’s important to make it last through the end of your days and beyond.  

Takeaways

  • Figure out your retirement age and the income you need to have.
  • Determine whether you’re eligible for Social Security benefits.
  • Brush up on tax specifications for RMDs and establish your fixed income.

Stage 5: Legacy

Do you have a family? If so, you’ll need to think about what happens to your accumulated wealth after you pass away. Rarely will you have just enough retirement funds to last you to the final year of your life – often, you’ll have more. This is where estate planning comes in. 

Estate planning dictates where your wealth goes after you pass away. It’s the final stage of the investment cycle. For most people, it involves passing that money on to your spouse or children through a trust. If you don’t have heirs, it’s about signifying a charity or somewhere else to receive your assets. In any case, you need to have a plan for your wealth after you’re gone. 

Takeaways

  • Work with an estate planning lawyer to draw up a will and create trusts.
  • Keep an eye on how much wealth remains and how it’ll get passed on.
  • Distinguish different assets in your will, including retirement accounts.

Stick to an Investing Road Map

What are the 5 stages of investing, and why are they important? They’re outlined above, and their importance comes from how they fit together. If you take the time to follow them, you’ll find yourself on the path to a well-planned retirement. Smart, measured, focused decision making across each of these stages is the key to investing success. Just be sure to take it one step at a time.

Your investment decisions can set you up for a retirement on your own terms. To learn more, sign up for the Wealthy Retirement e-letter below. The 5 stages of investing can become the foundation for your journey during this vital stage of life.


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