When people are young, making a long-term plan for their finances may seem unnecessary. But the reality is, the sooner they start thinking long-term about finances, the better position they’ll be in. Even if someone may not have much money now, there are several key areas of financial planning that they can start thinking about at any age. Read on to learn more about the importance of these key areas and why people are never too young to start thinking about financial planning.
Learn Basic Financial Concepts
There are several big ideas in finance that people are never too young to learn. For example, getting familiar with concepts like compound interest, how to borrow money responsibly, what it means to be in debt, and how to build a great credit score can put someone lightyears ahead of peers and help them prepare for the future. The building blocks of personal finance will come up repeatedly throughout one’s life. So, taking time when someone is young to become financially savvy can put them in the driver’s seat when it comes to their long-term plan.
Plan for Retirement
Retirement can seem in the distant future for someone in their 20s or 30s. But life goes fast, and whether someone is prepared or not, one day they will want to retire. Starting to contribute at a young age to an employer-sponsored retirement plan, like a 401(k) or 457, gives the money more time to grow. That means it’ll result in a much bigger retirement nest egg than if someone waits to start saving until later in life.
Get Proper Life Insurance
Younger people tend to have fewer financial responsibilities and less debt than older folks. But that doesn’t mean that life insurance isn’t an important consideration in someone’s 20s and 30s. It makes sense to get a life insurance policy when they begin to take responsibility for the financial care of others, be that a spouse or a child. A life insurance policy may also be a good idea when someone takes on significant debt, like a mortgage on a first home. Especially if they took out a loan with a co-signer, the right life insurance policy could cover the remaining mortgage balance, so it’s not all left to a loved one if something happens to that person.
Seek Out Diverse Investments
Diversification, which is the distribution of assets into various vehicles and asset classes, is essential to any well-rounded portfolio. And when people start to think long-term about finances from a young age, they can plan ahead to create a stable, diversified portfolio over time.
For example, a well-diversified portfolio might include multiple retirement accounts, like an employer-sponsored 401(k) and a Roth IRAs. In addition, knowing what it takes to diversify at a young age can give someone a greater opportunity to acquire and invest in different asset classes as they get older.
Plan to Regularly Re-Assess a Financial Plan
Someone’s financial goals will undoubtedly change throughout their life. Big life moves like a new career, buying a home, or getting married will require them to shift their goals and long-term plan. For example, saving to pay for a wedding might mean someone temporarily hits pause on aggressive debt repayment. Setting up a regular cadence, like an annual review of their financial plan, means they can proactively change their strategy to match their needs and goals.
The Bottom Line
Creating a long-term financial plan is one of the most important moves a young person can make. People are never too young to start learning about personal finance concepts, planning for retirement, getting proper life insurance, diversifying investments, and regularly reviewing their plan. In fact, the legwork someone puts into thinking long-term about finances will enable them to use money in a much more powerful way when they get older.
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