Be honest. Do you feel a bit of trepidation when you hear the words financial planning? I know the idea it suggests is a bit scary for some, especially Gen-Zs and Millennials. You might be thinking “I’m still trying to figure things out and get my life in order. I don’t have a stable financial situation yet. How can I go about planning?”
I understand completely. It is difficult to not think of financial planning as some high-level practice that requires complex execution which only financially stable adults can pull off. The good news is, that is not the case! You think only people of a certain income bracket or older age group can go about financial planning successfully? Au contraire!
I’ll prove to you in this article that financial planning can be simple and straightforward. It is an essential aspect of life, particularly for young adults, and it involves creating a good roadmap for managing your personal finances.
Its importance cannot be overstated as it helps individuals gain control over their financial future and make informed decisions about their money. If you’re in your 20s or 30s, single or married, and a newbie at this, get ready to learn the basics of what to do in a life-changing way.
What is Financial Planning?
Financial planning can be described as a way of mapping out how an individual’s finances should be handled. It is a process that involves analysing your financial situation, identifying your financial goals, and creating a plan to achieve those goals. Developing strategies to manage your income, expenses, assets, and liabilities to meet current and future financial needs.
Financial planning is all about the basics of financial literacy. Such as budgeting, saving, and investing, to achieve long-term financial goals. A comprehensive financial plan takes into account various factors, including income, expenses, savings, investments, insurance, taxes, and estate planning. It is a continuous process that requires regular monitoring and adjustment to ensure it remains relevant and effective.
Don’t get overwhelmed by any of this. The idea isn’t that you do everything listed at once. Rather, take it step by step so as to have a clear direction for managing your personal finances and give you a sense of control over your financial future.
Why Financial Planning is Important
Financial planning has numerous benefits that are critical for young adults and its importance cannot be overstated. So I can really drive this point home, let’s look at a few of them.
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- Achieving Financial Goals: A financial plan helps you set and achieve specific financial goals. Such as saving for further education, paying for your wedding, making a down payment on a house, traveling the world, or just building an emergency fund to cater to the eventualities of life. With a clear plan in place, you are far more likely to stay focused and motivated to achieve your goals in time.
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- Good Debt Management: A financial plan can help any individual reduce debt by creating a strategy to pay it off faster. By prioritising debt repayment, you can save money on interest charges and reduce the overall cost of borrowing.
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- Saving for Retirement: A financial plan can help you save adequately for retirement by creating a long-term savings strategy. Starting this practice while you are young, and investing regularly, means you can build a significant nest egg for your retirement years and not become a burden to other people such as your children. If you are part of the FIRE (Financial Independence Retire Early) brigade, you need a good financial plan even more.
It’s like this.
Not having a financial plan can lead to a lot of financial insecurity, stress, and reduced quality of life!
Without a plan, you are likely to struggle to manage your money effectively and miss out on good opportunities for savings and investments, whether you mean to or not. You run the risk of accumulating high levels of debt and making other costly money mistakes that lead to much financial distress, and affects your overall well-being.
A good financial plan is how you take charge of your money (and all things related to it) so you can achieve financial security and stability.
And now for the real meat of the gist.
Stages of Financial Planning
Financial planning has 5 key stages ranging from goal setting to the monitoring of your finances.
What is the First Step in Financial Planning
The first stage is the setting of clear financial goals. This requires you to identify your short-term and long-term objectives and write them down. Think about what you would really like to achieve with your finances in the next 3 months to a year. Then the next 2-5 years, and even longer.
Do you want to pay off all debt? Build an emergency fund? Take a certification course to build your skills and earning capacity? Save enough money for a vacation? Make a down payment on your dream home? This is not about what someone else wants. Do some soul searching and think critically about what would fulfil you. Write them down and attach timelines.
The Second Stage of Financial Planning
The second stage is good old budgeting. Once goals have been established, it is essential to create a spending plan by means of a budget. This involves first tracking your income and expenses to determine what money is being spent where. It is helpful in discovering areas where you can cut costs and save money, like the bills from eating out and underutilised subscriptions. Then you can go on to create a budget that aligns with your financial goals.
Depending on your preference, you can do this using a book and pen (be old school like me), or via budgeting tools or apps to create and stick to your budget. Your spending plan cannot just be in your head!
The Third Stage of Financial Planning
The third stage is saving. It entails that you create a savings plan as a cushion for a rainy day and to achieve the listed financial goals. To accomplish this, you must build the habit of paying yourself first. You could set up automatic contributions to a special savings account or retirement/pension plan like a 401(k) or IRA for U.S. residents.
It is also crucial to build an emergency fund to cover unexpected expenses, such as medical bills or job loss. Having at least three to six months’ worth of living expenses in an easily accessible account like a high-yield savings account is prudent.
The Fourth Stage of Financial Planning
The fourth stage is Investing. Creating an investment strategy that builds wealth over the long term and helps you be financially independent. This may include investing in stocks, bonds, real estate, and the like.
Now I understand that this stage can be scary to do, particularly if you have lost money with previous attempts. Significantly growing your money is something you too can pull off if you know and follow certain key steps. You can read about how to make smart investments here.
The Fifth Stage of Financial Planning
Finally, financial planning is a marathon that involves ongoing monitoring. It is important to regularly revisit and adjust the financial plan as circumstances change, such as getting a raise, starting a family, relocating, or facing unexpected expenses. This ensures that said plan remains relevant and effective in achieving your financial goals.
Your goals and timelines may need to change. There could be the need to adjust the budget or rebalance the investment portfolio. A regular review of everything would make it clear as to what tweaks should be made.
Financial Planning for Beginners
Financial planning can feel overwhelming, especially for a young adult who is just starting to handle personal finances. Don’t stress yourself out. Just breathe, and know that you can take the steps to establish good financial habits and achieve those financial goals.
In addition to the steps mentioned above, creating multiple income streams, such as taking on a side hustle to increase cash flow should be explored.
Establish good credit habits like paying your bills on time which helps build a strong credit score that serves you in the future. Also be sure to pay your taxes.
Avoid commonly made money mistakes like impulse buying, accumulating bad debt, living above your means, giving out bad loans, not saving enough for emergencies or retirement, and investing in high-risk assets without understanding the potential risks.
By taking these steps early on, you gain control over your finances and achieve the financial security and independence you crave.
Financial Planning with Spouse/Partner
When it comes to financial planning, it is essential to communicate and collaborate with your spouse or partner. By working together, couples can create a joint financial plan that aligns with each other’s priorities.
The first step is to have an open and honest conversation about your finances, including income, accrued debt, and financial goals. This would help identify areas of agreement and potential sources of conflict.
Next, establish shared financial goals, such as paying off debt, saving for a down payment on a home, building a trust fund for the kids, etc. List them out and prioritise them so you can develop a plan to achieve them through your budget. Then go through the outlined stages of planning.
Dividing the financial responsibilities could help ensure that you both are involved in the financial planning process and things run seamlessly. This may include designating one partner to manage the budget or investments, while the other partner handles bill payments or savings contributions for instance. Regular check-ins and updates are very important to ensure that you are on the same page and that the financial plan remains relevant and effective.
To Wrap Up
Financial planning is an essential aspect of personal finance for a young adult and it is never too early to start. Regardless of your income bracket, you can start securing your future by planning effectively for desired financial independence.
By setting clear financial goals, tracking income and expenses, creating a budget, having adequate savings and long-term investments, and effectively communicating and collaborating with their spouses and partners, individuals can successfully gain control over their finances and attain the fulfilling life that they want.
Kindly note that despite the fact that you can do many of these things on your own, it is important to seek professional advice when necessary, such as when making investment decisions or creating a complex financial plan. If you desire to talk about any aspect of your finances as you go about your financial planning, reach out and contact me here.