Financial Planning Like It's 1999!
When we are children and young adults, it can be easy for us to go about our lives without thinking about the true value of learning particular skills now, when we are young, rather than waiting until we’re older. When I look back at my life through those halcyon days of middle and high school, and even college, it makes me truly realize the significance and value of learning particular financial life skills when we’re young. These skills, I now realize, not only impact a young adult’s knowledge and understanding of finances at that age, but also evolve over time as they gain life experience and exposure to new and more complex financial concepts. As a Junior and Senior at the University of Wisconsin-Madison, I served as a peer educator for two Financial Life Skills courses, one for freshman/sophomore students, and the other for upper classmen, with most of the students being seniors preparing for life after graduation. The courses covered topics ranging from our personal view of money based on our core values, beliefs, upbringing, etc., to preparing financially for unexpected life events by establishing a “rainy day fund”, to utilizing insurance to best fit our needs. My interactions with these college students and other students over the years related to personal finance have highlighted for me a few key financial life skills/concepts. Three concepts that consistently arose and that I wish I was exposed to in greater detail at a young age are:
- Budgeting/cash flow management;
- The power of paying yourself first as a saving strategy;
- The value of compound interest.
Budgeting
I have become acutely aware, through my years of working with young adults, that the term “budget” often triggers feelings of uncertainty and apprehensiveness around the (perhaps misplaced) idea that creating a budget will be overwhelming and stressful. However, after just a brief exposure to the a few tracking tools and budgeting strategies, and a two-week long expense tracking activity, many of these same individuals showed a confidence and comfort level that was like a breakthrough. Of course there are many different tools that can be used for budgeting and cash flow management, but a tool that helped me obtain a better understanding of my money “habitudes” (habits and attitudes towards how I view money) was Mint.com. Admittedly, online budgeting isn’t for everyone, but for me, having my checking account and credit card linked allowed me to see exactly where I was allocating my resources in a crystal clear way. From there, it was a cinch to develop a spending plan that best fit my situation. With a tool like Mint, I was able to develop a skill that has made me more aware of my spending and eased any stress I might have harbored about the unknown. The thing is, with just a simple online search, one can find so many different tools and cash management strategies that one is almost certain to be best tailored to their needs and situation.
Paying Yourself First
While budgeting is a skill that can be so valuable to obtain at a young age, the concept of “paying yourself first” can leverage budgeting for a double pay-off. Paying yourself first means building a system that automatically allows you to achieve your saving/investment goals without taking any additional steps. Two common methods are setting up automatic contributions to a savings or investment account, or setting up automatic payroll deductions for contributions to one’s employer-provided retirement plan. Either of these simple strategies can drastically streamline the process of having to continuously manually allocate funds each week or month to the desired bank or investment account, a task which can be difficult to keep consistent. Combined with a personally tailored budget, automatic transfers produce not only peace of mind surrounding savings goals, but also provide a clear picture of exactly how one can be better prepared in the event of an emergency or unplanned expense. Having this discussion with young students while they’re young can equip them with a skill that may also help reduce anxiety regarding finances as they enter new and different life stages.
Compound Interest
While I wish that I was exposed to these techniques at a much younger age, I now see the immense benefits of living with the “pay yourself first mindset” as it also pertains to the impact of compound interest over time. Sometimes referred to as the 8th wonder of the world, the concept of compound interest is that over time, the interest you earn on an investment will be compounded by earning additional interest on that same interest. In other words, it is interest on interest. Think of this concept as our dollars going out to recruit more dollars to join them in growing over time. For example, two individuals each choose to save $300 a month until they are age 65 in preparation for retirement. Individual A is 25 years old and Individual B is 30 years old. Assuming a 5% annualized rate of return and compound interest, Individual A will have $457,806 at age 65, and Individual B will have $340,828. The dramatic difference in the total savings amount between these two individuals illustrates the effect of compound interest, as well as the impact that just 5 years can make in future savings. Understanding the true power of this concept at a young age makes the saving process feel more real, and positions us to realize the impact of saving now versus waiting to save later. And when we know it, we can act on it.
I feel privileged today to be able to reminisce about my childhood and life as a young adult, and find these three concepts rising to the fore as three skills that I wish I was exposed to even more at a younger age. My studies in college and now my experiences as a young Financial Planner have revealed the deep impact that having a solid foundation, built around these concepts, can have in navigating the financial aspects of one’s life. I see now how they can ease the stress and uneasiness that often accompanies learning new financial concepts. I will never stop advocating for our school systems to continue to integrate personal finance-related programs and courses in their required curriculum. But the main thing that strikes me today is that by taking a few small but significant steps on our part, personally, to educate the younger generation and to encourage them to experience and explore these financial concepts, we will further prepare them for the future and instill in them a confidence that can guide them financially the rest of their lives.
