Planning for the future is difficult. Just figuring out where you’ll be a year from now is hard, let alone five or ten years from now. This doesn’t mean you don’t try though. As you’ve heard over and over again, the earlier you start preparing financially for the future, the better off you will be. But how exactly do you prepare for your financial future when you can barely get a grasp on your financial present?
It’s definitely not an easy task and most likely something you’ll be working on for the majority of your life. The good news is that there are steps you can take now to help set yourself up for a better tomorrow. Let’s take a look at how you can build a better financial future:
Take Time to Understand Your Life Goals
First and foremost, it’s important to understand both your short term and long term goals in life, as what you want to achieve and accomplish will greatly affect how you prepare financially. Bigger things to consider are where you want to live, whether you want to start a family, and when you want to retire. Each of these decisions comes with a different price tag, which can vary drastically depending on when in life you want to accomplish these goals.
For example, it’s wise to start thinking about retirement as early as possible. It might not even be on your radar now but preparing for retirement in your 20s and 30s is crucial if you want to retire early and enjoy more of your life outside of a 9 to 5. That’s because quitting the rat race earlier than normal means that you not only have fewer years of work income, but your investment portfolio will also need to support more years of expenses all while not having as many years to compound.
Practice Good Habits Early
Practice Good Habits EarlyBad habits die hard, which is why you shouldn’t start them to begin with. This is of course easier said than done. Make a conscious effort to practice good financial habits early on in life. Learn to create a budget and analyze your spending. Have a clear understanding of where your money is going. Save a portion of your paycheck every month. Yes, you’ll make mistakes along the way, but you’ll establish healthy financial habits that are hard to break with practice.
Be Financially Savvy
Unfortunately, financial literacy isn’t a subject most people learn in school. Many 20-somethings feel overwhelmed once they enter the real world and realize that their paychecks don’t go as far as they thought they would. If you find yourself confused about the difference between a 401k and a Roth IRA, then take it upon yourself to become financially savvy. Read up. Ask your friends and relatives to point you in the right direction. Talk to a financial advisor and understand what investments are right for you. This definitely takes time and effort on your end but it’ll pay off in the long run.
Take Risks Early
Risks can be hard to take, especially if you’re older and have much more to lose. However, it might make sense to take investment risks now if you are young. Putting your money somewhere other than a savings account may be scary but you have the potential to see so much more return. And in the event your investment doesn’t work out, you’ll still have years to rebuild your funds.
David’s Note: Another advantage of putting your money at risk when you are young is that you aren’t risking as much of your nest egg since you likely haven’t had a chance to build up a substantial portfolio yet. I bet my life savings trading individual stocks when I was in my 20s, but doing the same now would be much riskier because I have a much larger investment portfolio these days with decades of savings under my belt.
Live Within Your Means
People most often forget the one most important rule to personal finance: live within your means. The rule is really simple, yet it’s extremely hard to follow. Financial temptations are everywhere, from that fancy new car you’ve been coveting to the checkout aisle at the grocery store, but take a step back and think back to the financial goals you’ve made yourself when you feel the impulse to spend all of your paychecks on something you don’t really need. Make sacrifices now and you will see the rewards in the future. Neglect your finances and you’ll be right where you started later, only to have far fewer options to prepare for the future because you will have fewer years left for your savings to accumulate.