What exactly is financial planning?
You’ve probably heard the term “financial planning” a lot, but do you know what it means? It has two key aspects – one related to companies and other legal entities and the other applicable to individuals.
Financial planning is mandatory for every business – this is how companies achieve their goals and overcome challenges. It is, however, equally important to individuals, and this is the type of financial planning we’ll focus on in this article.
We all have goals and dreams – things we’d like to do in life, whether they relate to “now” or “in general”. Stuff like paying back a student loan, being able to travel more, graduating from a great school, taking lessons, buying a house or an apartment, a new car, etc. Simply put, financial planning is the process that enables us to manage and plan our personal finances in a way that allows us to achieve all those goals.
Great… so does it relate to everybody?
Absolutely! We all have goals we’d like to achieve in life, and regardless of our current employment, age, family/background, etc., we should all plan our personal finances wisely. Otherwise, we risk unintentionally prioritizing less important things by spending our finances on them instead of achieving our dreams.
This is a risk people don’t often realize, and a lot of us fall into the “I want it all and I want it now!” trap before reaching financial maturity. While one bad financial decision might or might not lead to disaster, a series of smaller ones most certainly will. And sometimes people find it really hard to bounce back up.
That’s why it’s important to create a framework of sorts that allows you leeway in your financial decisions, even accounting for some mistakes. Because we all make bad decisions; what’s important is not only to learn from them but also to have an emergency fund or financial levers that will soften the blow.
Am I not too young to think about this? I don’t have any assets of worth.
There are, very broadly speaking, three main stages in life – when we’re young, middle-aged, and elderly. During those different times of life, people prioritize largely different things. Traditionally, it’s considered that because of their different lifestyle, younger people hold fewer assets.
In recent years, however, that assumption has proved to be wrong – young people are holding more and more digital assets, along with traditional ones.
There are several key reasons behind that:
- Nowadays, staying in one job for 15+ years is not as attractive as it once was, with the incredible variety of interesting companies and amazing projects that exist today. This, in turn, means people receive various benefits from the different companies they work for, including company stocks and stock options.
- As you find a partner and create a family, you also purchase products such as life insurance and investment insurance, and maybe even a house or an apartment.
- With today’s globalized world, it’s never been easier for people to move to another city, even to another country, for a job opportunity. This, of course, requires a lot of different things, including new bank accounts and insurance in those countries.
- Of course, there are other assets such as traditional IRAs, retirement plans and policies that some companies offer as benefits, among mandatory state-required ones, and retirement savings accounts.
- People are getting more and more into cryptocurrencies and investing.
- Video games offer a lot of digital content, most of which is paid, and people trade with it in various online marketplaces.
Regardless of how old you are and what stage of life you’re in, you have assets and they need to be protected. 20 years from now, the digital assets you had in a video game might not seem as important as your life insurance, just as when you’re 25, your crypto wallet might be more important than buying a house.
What’s common among all those things is that they’re all assets of yours, regardless of whether they’re digital or not. And if you don’t have a financial plan to protect them, you might find yourself losing a lot if not all of their value. Among the risks you face is the possibility of your loved ones not even knowing of your assets should anything happen to you.
OK, BUT I’m still not convinced I should plan for something 30 years from now
OK, we agree; trying to plan financially for 20-30-40 years from now, especially when you’re in your 20s, can be hard and tedious. Think of it this way, however: your way of life, your employment, your assets – all those will evolve with you over the years. Including your needs and the risks you’ll face. Add to that equation unforeseen events that might occur, and it quickly becomes a lot more complex.
Financial planning doesn’t mean depriving yourself of things you need or really want. It does, however, imply realizing we rarely get everything we want immediately, which, in turn, means we need to prioritize our goals according to our needs. The best way to achieve that is to put in place some basic foundational mechanisms that will allow us to reach financial maturity.
Experts say the best time to start saving is NOW. The earlier you start, the sooner the habit is established, and even more importantly, you will benefit from the growth afforded by compound interest. Albert Einstein is reputed to have called compound interest the eighth wonder of the world. He said, ”He who understands it, earns it; he who doesn’t, pays it.”
Key takeaways
- Financial planning does not mean depriving yourself of things you want but prioritizing the things that matter.
- It relates to everybody, regardless of their age, background, or employment.
- You have a lot more assets than you might think, and they all need protection.
- Without a financial plan to protect your assets, you risk losing their value.
- Planning for 20-30-40 years from now is tedious but necessary, and the sooner you start, the better protected you’ll be when something unforeseen happens.
