Money management is perhaps the most essential life skill any young adult needs to acquire. These days, wise spending habits are arguably the key to financial well-being and personal success later in life. Many young people are now receiving their first pay checks with absolutely no idea of how to save, invest, or even how to plan for future financial obligations; the impact of which can lead to considerable financial stress as their life progresses. Establishing an effective financial plan ensures a young adult lives a more stable life, free from undue financial burdens, and one in which they can accomplish their career and personal goals.

What exactly is Financial Planning?

Financial planning is the practice of managing one’s personal finances, which involves income, expenditure, saving and investment, in order to achieve one’s long and short term financial objectives. This may include forming a financial plan whereby one knows how to spend and save appropriately, making provisions for future commitments, such as a university education, buying a house, starting a business, or providing for retirement. The most important factor is that a large salary is not required in order for one’s financial plan to be a success. Young adults will be more likely to gain a good financial standing if they make use of sound decision-making abilities and display some level of discipline in their finances.

Building a Solid Financial Foundation Early

Building a solid financial footing in life from an early age. One of the benefits of making a financial plan when one is young is that the opportunity arises to establish sound financial habits that will benefit a person for the remainder of their life. Some of these positive habits would include setting a budget, regularly investing in different schemes, and staying clear of unnecessary purchases, all of which will act as a good foundation for a financially responsible future. Those who manage their money appropriately during young adulthood are likely to avoid all common pitfalls experienced by many young people today, such as high interest debt, overspending, or saving in their later years. Another added bonus of establishing financial habits early on is that this period provides ample time for financial mistakes to be made and learnt from.

Reaching one’s financial goals

Each individual has several personal financial aims that they would like to accomplish. Whether they desire to buy a car, travel around the world, undertake a degree or secure ownership of a property, attaining one’s financial goals requires a financial plan. It is financial planning that turns aspirations into reality, or in this case a realistic attainable target. If young adults are organized and have established realistic goals and the method to reach them through savings, they will find it easy and uncomplicated to acquire what they have always wanted. Furthermore, it will benefit one to know that spending one’s money aimlessly and wastefully is foolish and unnecessary.

Encouraging saving and investment

Sometimes when earning an income young adults get distracted with simply obtaining money instead of having a plan for it that involves saving and investing. Financial planning encourages young adults to set aside some funds for expenditure as well as investment. Saving money provides future security; investing money allows it to grow exponentially over time. By investing money early, many financial gains are achieved due to compound growth, the general premise of which is that the savings put aside by a person over a longer period will yield more returns than if they saved them over a shorter span. One would invest money on a regular basis into an index fund, a pension plan or a saving scheme, whereby this will not only provide a young adult with security but will also ensure they are able to meet future financial commitments when they arise.

Alleviating financial stress

Lack of financial security is now considered one of the most predominant causes of stress among young people today. Family expenses, loans and careless spending habits are but a few of the main causes of personal angst; however, financial planning can reduce stress by ensuring money is utilized prudently. Emergency savings, financial plans and budgeting will ensure that there are never funds missing when the unexpected occurs. An absence of financial worries may lead to a more focused approach to education and personal growth.

Avoiding debt

It has become increasingly simple for young adults to overspend the funds which they have in abundance. It has been noted that credit cards, loan schemes and online shopping, among others, have made this scenario all the more common. One may utilize loans for legitimate reasons but if credit cards are constantly used to fund frivolous purchases, high interest debts can easily spiral out of control. Through careful financial planning, the need to accumulate unjustifiable debts will become negligible, preventing a person from being tempted to spend more than they currently have. The principle of not spending more money than one earns can guarantee a financially responsible life; effective debt management at a young age also helps increase a young adult’s credit rating, allowing them access to better home and business loan deals.

Saving for a “rainy day”

No one knows what the future holds. A person may become a victim of sudden illness, job redundancy or an emergency within the family; events such as these can create sudden financial hardship and have the potential to cripple an individual. Financial planning allows young adults to adequately prepare for these scenarios by putting aside the relevant funds to cover the financial strain (3-6 months of income and expenditure is a common recommendation).

Planning for retirement

While retirement may appear to be light years away for a young adult, it is nevertheless important for this decision to be made early on in life. This will allow optimum returns to be earned due to investment and compound interest. A young adult who consistently sets aside small amounts from their income during their early twenties will be more likely to have significant savings than if they choose to save a large amount when they are in their forties or fifties.

Improving one’s financial knowledge

Ultimately, making a financial plan is an education in itself. Young adults become more aware of aspects of finances such as budgeting, taxation, investments, insurance and much more, which helps them avoid potentially costly financial mistakes such as falling victim to investment scams.