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Planning for Your Financial Future

August 15th, 2012 · Guest Post

Young people who believe that making a living is tougher for them than their parents could be right when it comes to money management. Many young people, fresh out of high school or college, find they’re on their own in managing their financial future. Fewer companies offer comprehensive benefits packages with generous life insurance and pension plans.

As more retirees strain the safety net of Social Security, young adults cannot count on the government to pick up the slack. Complicating the matter is the vast number and variety of investment options available to them. When their parents got out of school, financial management amounted to little more than choosing a checking or savings account. The average person didn’t even think about the stock market or the bond market.

Today, young adults are bombarded with information and advice on how to spend, save, borrow and invest. Yet many do not know the difference between the stock market and the stockyard because no one taught them how the financial world operates. Furthermore, young adults face more pressure from advertisers, the media and society to spend. Easy access to credit and the temptation to buy-now/pay-later leads many young people to run up lots of credit card debt at 20 percent interest rates.

It’s never too early or too late to begin planning your financial future. Smart people start saving in their 20s, sometimes even their teenage years. The biggest mistake people make is waiting too long; the closer you get to retirement, the tougher it becomes.

Young people who do start thinking of saving early might wind up much better off than their parents thanks to the miracle of compounding. If you save $100 a month for 25 years, you’ll have $95,000, assuming an annual fixed investment return of 8 percent. Of course, the trick is to find an investment vehicle with a high return and risk you’re willing to take. Generally, the higher the return, the greater the risk.

While some young people are well equipped to handle their money, those who are not should seek professional advice. Parents should also offer advice if their children encounter problems. Simply put, if their kids financially self-destruct, it’s going to fall back on them, and they’re going to have to take care of their kids again

Young people who want to build their fortune should follow these steps:

  1. Prioritize saving. Compounding is the secret to successful retirement savings. The earlier you start the more the money will compound. The key is to start early.
  2. Set goals. Write down everything you want to have and do in the next five years. Choose what’s most important to you.
  3. Calculate what you need.A logical first step in planning your financial future is to calculate how much money you’ll need once you retire. Ideally, you would consult with a banker, brokerage firm, investment advisor or financial planner to determine that magic number.- Retirement calculators are a quick and easy way to determine the amount of money you’ll need once you retire.

    – The rule of thumb is that a person is going to need 80 percent of today’s income for retirement.

  4. Start a “pay yourself first” budget. Include a category for yourself in your budget and always pay yourself first. Try to build a reserve of three to six months’ worth of expenses, in case you run into an emergency, the need for mediation service, or lose your job. Later, after the fund builds up, you can investigate other investment choices.
  5. Avoid spender’s disease. Learn the difference between needs and wants. You need food; you want new sneakers.
  6. Join the financial world. Start a relationship with a bank and establish good credit.
  7. Get smart. Read about financial planning and go to seminars. Learn about the basics of stocks, bonds, savings accounts, mutual funds and IRAs.
  8. Stick with it. When you get discouraged, get out your list of goals and ask yourself, aren’t they worth a little extra effort?

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Brad writes on a handful of topics, including arbitration and personal finance.

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