From Here to Financial Happiness

Day Forty Five Riding the Life Cycle

Two days ago, we discussed the virtues of being an owner. Yesterday, we tallied your assets and liabilities. How should all this change over your lifetime?

When we start adult life, we might have substantial student loans and little or nothing in savings. But we also have four decades of paychecks ahead of us. When we reach retirement, we will have no more paychecks, but – if all has gone well – also no debt, a house we own, and a hefty pile of savings. Those savings might be in a mix of stocks and bonds.

What happens in between? Initially, the debts can pile up thick and fast. On top of any student loans, we might take out an auto loan to buy a car and a mortgage to purchase a house. Obviously, we need to be careful not to borrow too much. But taking on debt can be a smart strategy, because it helps us jumpstart our financial lives, and we know we have decades of paychecks ahead of us to whittle down these debts.

As we take on debt early in our adult lives, we should also start saving for the future. How should we invest those dollars? If we have goals that are more than five years away – think retirement and our toddler's college education – the money should be largely in stocks. That might seem risky.

But if we look at our broad financial picture, the risk involved is modest. The amount of money in our portfolio is probably tiny compared to the paychecks we hope to collect. Those paychecks will likely provide us with a fairly steady ...