In our 20s, planning for the future may seem pointless. YOLO and FOMO become the mantra for living while aspects like marriage, homeownership, child’s education, and retirement planning, seem like vague milestones in the distant future.
But 20-somethings must realize that planning for one’s financial future puts them in better control of how their life may look like, 10, 15, or even 20 years from now. Of course, goals and priorities keep changing along the way – be that as it may, it is better to start with a financial plan and tweak it based on one’s changing priorities.
If you’re a 20-something reading this, here are a few things that I’d share based on my personal and professional experiences:
Begin with the end in mind
Dr. Stephen R. Covey, in his bestselling book The Seven Habits of Highly Effective People, defined the 2nd habit as – Begin with the end in mind.
The idea is simple – Have a clear end goal in mind (it’s ok if you’re not 100% certain about your goals. People rarely are. But it helps to visualize the career, financial status, personal goals, etc. that we want in life and accordingly prioritise our actions). Apply this principle to financial planning and list down your goals (at this point in time) – be it early retirement, traveling the world in your 20s, homeownership in your 30s, or higher education in your 40s. These goals help give you a sense of purpose to manage your money – even if your goals change in the future, the money will usually still come in handy.
Planning: Great. Overplanning: A strict no-no!
You want to create wealth. You’ve read everything on the subject, spoken to advisors, and made meticulous plans, and you’re just waiting for the right time to put this plan into action. Wait, what? Things changed? Now you have to go back to researching, reading, and speaking to advisors all over again!
There is a thing called ‘overplanning’ your finances. It can keep you from making any real headway in your financial journey.
My advice? Don’t try to overplan and get everything right in one go. No one does and neither will you. Instead, keep saving and investing consistently, without obsessing over market timings. The path to wealth is strewn with the learnings from one’s mistakes – so go ahead, make mistakes and learn from them.
Leave room for error (and curveballs)
Morgan Housel in his now ubiquitous book, The Psychology of Money, says, “
The most important part of every plan is planning on your plan not going according to plan.”
What would this mean in the context of financial planning? Well, two things – one, don’t put all your eggs in one basket. And two, have someone trustworthy hold some extra eggs for you safely.
The first is about diversification. Well, it’s ok to make mistakes as long as they don’t wipe you out. Let’s say you do a lot of research and come up with (what you believe) is the best financial instrument. What next? Putting all your money into the said instrument? I would strongly argue against it. The world is too unpredictable a place and the value of assets are dependent on the views and actions of far too many people for one to estimate it right. So, despite your best research, the chances of you getting it right are probably closer to flipping a coin. And so, diversify – put your money into different investments, some slightly risky, some a wild bet (only if you have the appetite), and some boringly stable. So that your mistakes result in learnings not financial destruction.
The second is about a backup plan. You’ve sown the seeds of financial success, but what if an unseasonal rain destroys your crop? We all have an innate desire to protect our loved ones. And in our absence, the only way we can really do it is by ensuring they are covered financially. Our goal-oriented investments are like the seeds sown – they will reap a harvest of wealth in time. But if you were to die in an untimely manner, these investments wouldn’t have gotten the time they need to create wealth. And that’s where something like term insurance plays its role as a backup plan – helping your family manage their expenses, meet healthcare costs and achieve their life goals without struggling to make ends meet. Think of it like the second engine in an aircraft.
Bottom line
A successful financial plan would need you to clearly identify your goals, then move to doing some research, and lastly, take action. And while doing all this, do remember to diversify and buy a second engine for your aircraft in the form of term insurance!
