Very few people in their 20s think about managing their money or getting on the path to financial freedom. I didn’t, and now I wish I had.
Still working (at marketing agency Straight North) and having just turned 60, I have plenty of hindsight at my disposal. That being the case, I thought I’d share a few realities that, if you are a younger reader, may prompt you to start putting together a financial plan.
Believe me, if you do, you’ll be glad you did 20 or 30 years down the road — no matter what road you take on your life journey.
Why You’re Not Planning
Financially speaking, adult life goes through a couple of phases. Wealth accumulation and then, wealth preservation.
Young people are busy accumulating wealth, normally by working very hard and very long. With the cost of living being what it is, hard work and long hours probably get the bills paid with nothing left over to invest.
Why, then, would someone in this situation need a financial plan?
Why Plan Early?
Jason Day is one of the most successful golfers on the PGA Tour. One reason he succeeds is visualization. Before hitting the ball, he closes his eyes and imagines the perfect shot, how it’s going to look. Jason Day has earned more than $37 million playing golf.
In the same way, you can visualize your financial security well ahead of the day you strike it rich. Start thinking about what your savings needs to look like in order to meet your needs 5,10, 20, 30 years down the road. And you will have a more concrete idea of what you need to do 5, 10, 20, 30 months from now to meet those needs.
Similar to Jason Day, with a financial plan put to paper, you will be able to visualize your next financial “shot”. While perhaps not being able to save or invest large sums, you will make better decisions about salary negotiations, making major purchases such as a house or car, and running up substantial credit card debt.
An early financial plan also gives you peace of mind.
Continually wondering and worrying about paying for the car you just bought or the apartment you just moved into have a way of distracting you and diminishing your quality of life.
If you can visualize your financial future, you won’t worry so much about the financial present.
A danger of waiting to formulate a financial plan — and it is a grave danger — is waiting until it is too late. It’s very easy to drift from job to job, salary to salary to salary, purchase to purchase. Do that long enough and you are liable to wind up in debt, deeply and permanently.
Time is of the essence when it comes to savings and investing. If you invest $100/month at 3 percent interest, in five years you’ll have about $6,500. Do the same thing for 30 years and you’ll have over $58,000. If this doesn’t convince you that setting yourself up to invest and save as early as possible are important, please keep reading.
The Future Is Expensive
I never had any idea how expensive life was going to be as it unfolded. There are a lot of costs you run into along the way that can be frighteningly expensive. Here is a brief sketch of just some of the highlights.
- Paying student loans. Young people today are in much worse shape on this score than our generation. As college loans today are bigger and more widespread. We started with nothing; you may be starting in the hole.
- Advanced degrees. To their credit, many people today opt for MBAs and other advanced degrees to further their careers and earning potential. Tuition, as you already know, is substantial.
- A house. Taking out a six-figure mortgage loan is a 15-30 year commitment. And, if your finances are out of whack, you may have trouble even qualifying for a loan.
- Children. If you think babies are expensive with diapers and formula and doctor appointments, just wait. The bigger the child, the bigger the expense — day care, baby-sitting, books, bicycles, sports team uniforms, family vacations, summer camp, music lessons, tutors, private school, on and on.
- Insurance. With a family and property comes a greater need for insurance. While I am not a financial advisor and do not recommend any specific type of investment, most people want to shield their families financially from the consequences of an early death of a parent. And protect themselves against losses to property and from lawsuits or physical injury. Auto insurance goes up as you buy/lease nicer cars; homeowners insurance goes up as you buy nicer homes. All of this is over and above the cost of everybody’s favorite — health care insurance and out-of-pocket costs. Which, as you already know, are expensive, and figure to keep going up and up.
- College. Paying some or all of your child’s college expenses, as you already know, is an immense undertaking. One estimate I found shows the cost of four-year private college tuition and fees as $323,900.
- Retirement. You’re probably too young to be thinking about this right now. But trust me, many people my age are surprised to see how much savings it takes to maintain the lifestyle they were used to when they were working. Those that figured on tens of thousands find the reality is hundreds of thousands. Those that figured on hundreds of thousands discover it takes millions.
Work With a Pro
Last but not least, don’t take financial advice from just anybody. Find a CFP (Certified Financial Planner) you like and trust. Such a person can give you guidance, perspective and options on any question you have regarding personal finances.
Talk to several and vet them carefully. A good way to start looking is to seek referrals from family, friends, or professionals with an active savings and investment plan. Having a pro in your corner will help you make better decisions and reduce stress, so you can fully enjoy the fruits of your labor.
About The Author
This article was written by Brad Shorr, Director of Content Strategy at Straight North, an Internet marketing company in Chicago that provides SEO, PPC and web design services. With more than 25 years of sales and marketing experience, Brad has been featured in leading online publications including Forbes, Moz and American Marketing Association.