Life Cycle System is actually the trends or behavior of majority of Humans towards investment. It tells us that how we people normally spend our lives by spending,investing and saving money. Through this Life Cycle System we can come to know that when we Humans in our lives normally spend, when we start investing for the future, and when we get the desire outcomes means return on our investment. It is actually a tool which divide Humans life in three phases according to their behavior towards utilizing of money in through out their life.
The first phase of our life is Accumulation Phase. In this phase we do the following things:
a) Individuals in early to middle years of their working carries are in Accumulation Phase.
b) Net Income is small and debt for car loan may be heavy. For instance if one is willing to buy a car, but in this phase his net worth would be less according to the price of car which he is not able to pay right now in this phase.
c) They are willing to pay make high risk investment in the hopes of above average returns. For Instance, in this phase one is not much careful about that where he is doing investment, he just want high return, and as we all knows that high return demands high risk.
d) Funds Invested In this phase will reap high financial benefits during later phases.
The Second phase is the consolidation phase, in this phase the net worth on income of one is high and his expenses are comparatively low. This Phase has following characteristics:
a) Consolidation Phase lie on midpoint of individual career. In this phase outstanding debts are paid off. Further more, in this phase the income of individual is high as compared to his expenses, so that he is able to pay off all his outstanding liabilities.
b) Earnings exceed expenses, so excess funds are utilized to buy assets.
c) Individuals are concerned about capital preservation's, and do not take much risk. Moreover. individuals are much careful about investing somewhere, he/she invest in such place where not much risk is present.
d) Here in this phase individuals will buy assets for the future, he get increase in capital gain, but he cannot take much risk regarding his investment.
This is the Third phase of Life Cycle System. In this phase individuals have to spend, as there expenses are increased as compared to their earnings. This phase has following properties:
a) This phase begin when an individual retires.
b) Expenses are met from Prior Investment.
c) Investments in different aspects have mature and provide funds to utilize in this phase. For Instance, if one has done investment in the real Estate, then in this phase his investment would be mature and now in this phase he will start getting return on his investment, which he had done in the Consolidation Phase.
Well this is all about the Life Cycle System, and we have divide the Human life in three phases. Though no one is sure about these phases, as these could not be apply on whole Humans, but majority ones has same behavior.