Age Based Financial Planning: 20's and 30s Financial Independence

What should I be focused on?   A look at financial planning milestones at various decades of a person’s life.

As we age our relationship with finances changes.  From the early years of doing chores for an allowance to late stage estate planning our goals for finances will be impacted greatly by our age and where we are in life.   So with that I wanted to lay out some financial planning milestones tied to where individuals are in life.

20s and 30s: Financial Independence.  I believe this stage is critical as it lays the foundation for your financial future.  Here are some of the key financial planning points for this age group.

• Cash flow planning.  This involves starting to understand the income coming in through earnings and the dollars being spent.  The goal is to develop the habits of living within your means, saving some additional dollars in an account for an emergency, and investing some additional dollars in an account for the future such as a 401(k) or IRA.
• Debt management.   Many people in this stage have accumulated debt through student loans, car loans and/ or a mortgage.  Debt management involves understanding how much debt someone can take on and figuring out a plan to pay that debt off.
• Invest in yourself professionally.  This is a great age to start to acquire the professional knowledge you need to advance in your career.  The goal is to determine what career you want to pursue and lay the foundation for success by earning whatever credentials you need to excel in this field while you have time.  As you get older you will have more obligations (family, work, mortgage, etc) so free time will be rare.
• Check your credit.  A good credit score is important for when people apply for car loans and mortgages.   It will determine the amount you will be able to borrow and the interest rate.  One of the goals is to build a good credit score by paying back debt in a timely manner and not letting your borrowing exceed what you are capable of paying back.
• An understanding of investing.  This is the age where people should start to gain an understanding of how investing works.   The goal is not to become a day trader but instead to understand some basics so that when you begin investing in your 401(k) you have an idea of what you are investing in and the purpose of the investment.  The beauty of investing early is the time and compounding that can work in your favor over a long period.  The sooner you learn this, the better your chance of success.
• Understand the difference between an emergency fund and investing for the future.   Investing for the future involves a specific goal and time period.  Retirement for example.  An emergency fund is a bucket of money set aside in the event that something unexpected pops up.  This can include a car breaking down, a health event, a job loss or something going wrong with a house.  The goal is to have enough saved to be able to cover a majority of the cost without having to go into more debt.

As mentioned above, a person’s 20s and 30s is a key development stage for an individuals financial life.  Decisions are made that will impact the rest of their life.  Using this time to lay a solid foundation by addressing the issues above will put you on the path towards success.