This blog was written by Britney Pontecorvo, an MSU Psychology Major/Gerontology Minor.
Imagine, right now you are 20 years old with not a care in the world. But, in just a few years’ time that 20-year-old care free young adult you once were is now 65 years old and ready to retire. Bad news for you though, you did not understand the basics of financial planning and therefore did not start saving your money throughout your lifetime to be able to retire at 65. Now you must work until you are 80+ years old to keep up with your expenses. This nightmare could have been avoided if you had just understood your finances when you were a young adult.
The Steps to Financial Planning
It is common to hear that everyone wants to be smart with their money now-a-days. But it is such a waste to hire a professional financial planner when one acronym can help you make the same plan as a $180-240 an hour financial planner can make (Roth, n.d.). E.G.A.D.I.M. (Thune, 2018).
Thune (2018) explains that E.G.A.D.I.M. stands for:
- Establish the goal
- Gather data
- Analyze data
- Develop a plan
- Implement the plan
- Monitor the plan
The purpose of establishing a goal is to gain clarification on where your financial destination is. This step is where you explore your feelings about investing, how you plan on saving enough money to retire, and what you think your strengths and weaknesses concerning money.
Next, we need to gather data about yourself and what you have done so far in regard to your financial goals. The most common data that is needed to be collected are: how close are you to achieving your goals; have you started saving money yet and if so how much; do you have children that you need to think about and keep money for; what age do you want to retire; and what is your annual income.
Analyzing the data you have compiled is next. To do this, there are multiple financial calculators online where you can simply plug in numbers and see if you are on your way to achieving your financial goals, or if your calculations are off. An easy to use financial calculator is AARP Retirement Calculator (2016). Here is an example of what the AARP Retirement Calculator will look like:
You are halfway there! The next step is to put all of your information together and develop a plan of action. Thune uses the example that you need $1 million to reach your established goal. But, you are only sitting at $900,000 and need to make up for that $100,000 loss. One solution to make up for the money lost is you could increase your stock holdings. Another solution to make up for the money lost is you could change the way you live now in order to save more money for the future. With multiple solutions, the way you develop your plan of action requires some wiggle room.
You have made your plan of action and are ready to implement it! This step takes discipline and hard work but the sooner you start the better. Perhaps your goal was to save $300 per month, in your first few months consider slowly moving up to that goal so that you can adjust your everyday expenses accordingly.
Lastly, now we just monitor. This step is where you watch and see where your plan of action needs adjusting since nothing stays the same forever. The key is to remember that flexibility is necessary and that you can refer to the steps above whenever anything significant in your life occurs.
Tips for Young Adults
Financial Planning does not require a financial degree, bachelor’s degree, a college education, or even a whole lot of time, but here are some tips that you may have never learned (Fontinelle, 2017).
1. Learn Self-Control
Do not use a credit card unless you have the money saved up for the item you are wanting to purchase. Paying interest on something as silly as socks will not help you in the long run.
2. Take Control of Your Own Financial Future
Other people will take advantage of you and your money if you do not understand and manage it yourself.
3. Know Where Your Money Goes
Budgeting is your friend! If you are able to save up money while you are younger by not getting Starbucks every morning, then you will be able to enjoy it in your retirement and take that trip to Europe.
4. Start an Emergency Fund
No one knows when an emergency might happen. A rainy day fund can help get you out of a sticky situation and help you sleep better at night when the time comes.
5. Start Saving for Retirement Now
The way compound interest works is the sooner you start putting money into it, the more you will have later.
6. The Bottom Line
You do not need to be an expert to plan for your future financial well-being. Just live within your means, save as much as you can, and start now.
References
- AARP. (2016). AARP Retirement Calculator – Retire The Way You Want. Retrieved September 18, 2018, from https://www.aarp.org/work/retirement-planning/retirement_calculator/
- Fontinelle, A. (2017). 8 Financial Tips For Young Adults. Retrieved September 18, 2018, from https://www.investopedia.com/articles/younginvestors/08/eight-tips.asp
- Roth, A. (n.d.). How to Choose a Financial Planner, Adviser – Annual Fees, Your Investm… Retrieved September 18, 2018, from https://www.aarp.org/money/investing/info-03-2012/two-sides-of-financial-planner.html