Financial Planning for Young Adults and Millennials
Mark Twain once said of growing up that, “it happens slowly, and then all at once.” One day you’re worried about nothing more than hanging out with friends and planning the weekend’s activities. Then all of a sudden there are more pressing matters on your mind, like getting that promotion, possibly buying a house, and finally tackling that mountain of student loan debt. For many of us, the concept of financial planning for young adults can be daunting.
The transition from young person to young adult can be swift. And the decisions you make as a young adult – especially with regard to finances – can have long-term consequences. The millennial generation has not been good about planning for retirement. Financial planning for millennials is one of the things we are most passionate about.
The good news is that if you make some smart choices now, you’ll find yourself in a healthier financial position in the future. If you make unwise decisions, you may find that life is a little more challenging than you had hoped.
There are a lot of things you should focus on as you transition into adulthood. However, the three items below should be comprehensive enough to give you a solid foundation for the future.
Invest in your greatest asset
What’s your greatest asset? No, it’s not the awesome car you bought for yourself for you 25th birthday. Actually, it’s your ability to earn income.
Think about it – you have decades of working years ahead of you. Much of your wealth and financial health will be dictated by the amount that you earn.
You can maximize this asset by investing in yourself. Now is the time to learn new skills and enhance the ones you already have. Look for ways to position yourself on the career path that you most desire. If you need to make a career change, do it now, before you’re limited by big financial and family obligations.
Start saving and investing early
Albert Einstein once said, “Compound interest is the eighth wonder of the world.” He wasn’t kidding. Other than your earning ability, there may be no tool more powerful than earning compounding interest over a long period of time.
Interest is compounded when the interest is paid not just on a principal amount, but also on any accumulated interest. For example, if you have $1,000 in an account that earns 5 percent interest, you’ll get $50 in interest the first year. In the second year, though, you’ll get $52.50 because the five percent interest was paid on a balance of $1,050 instead of just $1,000.
That was a simple, two-year example. However, consider what it would happen if that interest was stretched over 30 years. Any idea what the final balance would be? After 30 years, that original $1,000 would have turned into $43,000.
This is where your youth is such an advantage. The earlier you can start the compounding process, the easier saving will be in the future. Even starting small is worth it because you’ll get the benefit of more compounding.
Lay a solid foundation for your future
Now is also the time to start thinking about what the near future may look like. Are you married? Engaged? Are you thinking about a family?
Spending has a way of creeping higher and higher as your family grows. You’ll need to upgrade from that loft to a house. You’ll find yourself spending money on things that you had never even considered in your single days. Diapers, baby food, daycare – they all add up.
Think about some of these big near-term goals and how you can prepare for them. A trusted financial advisor can help you with this process. He or she can help you set priorities and then work with you on developing a road map to reach your goals.
More articles on financial planning for young adults can be found here.
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