As we go through various stages of life, our financial strategies change. Our monetary needs in our 20s differ from those in our 30s or 40s or as we face retirement. However, there are some financial habits that will prove invaluable at every stage of your life, from when you open your first bank account right through to retirement. You just have to be ready to adapt as your personal finances require.
When you are starting out, your immediate financial goals are to help you achieve independence. You get a full-time job and a steady paycheck, and the money you earn goes toward rent or car payments. Perhaps you are focused on graduating college, which means you need enough money to cover your tuition and college expenses, and then you need to concentrate on paying back student loans. When you get married, it’s time to think about buying a home and raising a family. No matter where you are on life’s journey, you should be planning to save and thinking about retirement.
At each stage of your life, you are going to have to manage your money, determining how to pay your bills, manage your debt, and save for the future. And although your basic financial priorities won’t change, how you approach them at different stages of your life will.
How to Think About Financial Planning
Before you start planning for your financial future, take a deep breath and start getting comfortable talking about money. Money is a taboo subject in our society, and many people are uncomfortable talking about it. However, if you don’t talk about money, even with yourself, then you can’t take control of your personal finances. You won’t be prepared to make informed decisions about how to manage your wealth. Remember, you should control your money, not the other way around.
The best way to get comfortable with money is to create a budget. You are never too young to start saving, but to save effectively you have to understand your income and expenses. If you include saving 10-20 percent of your income as part of your budget from the outset, it will make it easier to keep saving as your personal finances change. Saving money should become a habit so you aren’t living from paycheck to paycheck.
In order to set up a budget, you need to track your spending. Inventory your expenses and match your income to your outgoing costs. This will give you an overview of your finances and tell you where you can reduce costs and how much you can save.
Once you have a working budget you can start setting financial goals. Whether you are saving for new clothes, a vacation, or a new house, having a budget in place gives you control over your finances so you can start developing financial strategies to achieve your goals.
Lay Your Financial Foundation in Your 20s
You should start establishing a financial foundation as early as possible. Most people open checking and savings accounts when they are in their teens or even earlier. These are the core tools you will use to manage your money. You can use your checking account to track your spending to help you with budgeting. You should be able to map your income to your expenses so you aren’t living beyond your means and have some money to put into savings
Your 20s is also the time to start establishing credit. Learn how to use credit cards and manage debt. Getting a credit card will help you start to establish a credit history, which you will need to borrow money. However, be careful how you manage your credit card debt. Credit cards are great for emergencies and some purchases, but don’t accumulate more debt than you can pay off each month.
As part of your financial strategy, you also should establish an emergency fund with enough money to pay for 2-3 months of living expenses. Also consider investing some of your savings as part of a retirement strategy—the earlier you invest, the greater the return over time.
Your Financial Strategies Mature as You Do
As you get older, your priorities will change, and so should your financial strategies. When you reach your 30s, you will want to adjust your financial goals. You may want to buy a house or start planning for your children’s college tuition. Create a long-term financial plan with your partner. You also will want to eliminate as much debt as you can, such as credit cards and student loans, and you may want to prepare to take on other debt, such as a mortgage.
Of course, you should continue to save. Use this time to maximize retirement savings, including contributions to tax-advantaged retirement vehicles such as 401(k) plans, individual retirement accounts (IRAs), and certificates of deposit (CDs).
Most people reach their peak earning years in their 40s. This is a good time to re-evaluate your long-term financial goals to see if you are on track. You also want to get more aggressive about your retirement savings. Put more money in investments so it has time to grow before you retire.
When you reach your 50s, it’s time to reassess and make further adjustments to your financial plan. If you haven’t achieved your financial goals, now is the time to play catch-up. You want to maximize your retirement funds and may want to reassess your retirement. This is also an excellent time to review your will and insurance policies.
Into Your 60s and Retirement
As you reach your 60s, all those good financial habits should start to pay off. Assess your retirement fund and see if you have achieved your retirement savings goal. Consider when (or if) you want to stop working and when you want to start collecting social security. You also want to calculate when to start spending your retirement savings, including the tax consequences and other factors. You will need to revise your household budget to accommodate your life in retirement, including adjustments for cost of living and expenses such as travel. You also should think about whether you will want to save a portion of your savings for loved ones or charitable causes.
As your life changes, your financial needs will change as well, and you will want to use different financial tools to meet those needs. Start with the basics, such as a checking account, savings account, and credit card. Create a household budget that will keep you in control of your finances and help you establish good financial habits such as saving. As you mature, your financial strategy will mature as well, encompassing investments, retirement funds, and obligations such as a mortgage. Track your progress and adjust your financial goals as your life changes.
To help you along the way, consider finding a financial advisor who can guide you. Your full-service banker can help you make informed decisions about the best types of checking, savings, and retirement accounts, and they can help you maximize your savings to achieve your goals.