Financial planning is an ongoing process that an individual will go through to help them make good life decisions about money. As an individual we all have financial goals that will require some planning if we need to meet these goals. Goals such as buying a house, buying a car or retirement to name a few. The first step is to quantify these goals so that we can save towards meeting them, but when we start to save for these goals is a key factor. Here are a few reasons why you should start your financial planning early.
Firstly, starting early allows you to more effectively meet your financial goals. It has been proven that if someone saves early they will be able to meet there financial goal. Let’s use an example, if Richard starts to save at age 25, Brian starts to save at age 35 and both guys save the same amount, what will be the outcome? It is seen that at age 65, Richard will have approximately $400,000 and Brian will have approximately $200,000. From this example Richard would have contributed 33% more than Brian over the period (due to the differing start dates to age 65), but Richard would have accumulated 50% more in savings over the same period as the graph below shows.
Secondly, starting early allows you to become a millionaire by saving small amounts. It is seen that when compound interest and starting early work hand in hand you can become a millionaire. We have two individuals who both invest at a rate of 6% p.a. Stella starts at age 20 with a monthly contribution of $361.04 and Tracy with a monthly contribution of $698.41. Tracy has to save approximately double the amount of Stella in order to achieve the same goal. THE POINT: the earlier you start the less you will have to contribute monthly and the more you can enjoy life, otherwise you will have to contribute more as time pass to meet your goals.
Thirdly, compound interest also acts as a catalyst to help grow your money faster the earlier you start you financial planning. In the graph below it is seen that Susan contributed $50,000 between age 25 and age 35 and the result at age 65 was $602,070. If she only contributed $50,000 and no more, she would have earned over $550,000 in interest. Then there is Bill who invests $5,000 per annum for the 30 years between age 35 and age 65. Bill would have invested $150,000 creating an investment balance of $540,741 at age 65. Chris invested $5,000 per annum for the past 40 years from age 25 to 65. Chris would have invested $200,000 giving him a balance of $1,142,811 at age 65. THE POINT: if you invest early and consistently towards your goal, compound interest would assist you in meeting your goals with extra cash to spare.
Source: Business Insider/J.P. Morgan Asset Management
Another point: by starting your financial plan early you can have a lot more options and flexibility in life. Some people start their career but change jobs before retirement or they may leave their jobs to start their own business. By saving early it allows for you to have that option because you would have created a’ nest egg’ or ‘blanket’ of financial safety.
Also starting early allows avoid unnecessary debt. This will occur because you will have the cash saved for what you may need to purchase. Some people always have to take a loan to help meet their needs. This can hurt you in two ways:
1) the monthly instalment reduces your ability to save, and
2)you will therefore take longer to meet your financial goals (especially during high interest periods).
Starting early allows you to put away small amounts that can multiply into larger amounts and still have your entire salary to enjoy your life. If, however, you wait to start when you are near to your goal, for example retirement, you will need a lot more from your salary per month to achieve and maintain that goal. Also, starting early allows you time to fix any mistakes that may occur. For example, if you make an investment which results in a loss there could be lees impact since you will still have some time to adjust or make changes to meet your financial goals.
In conclusion, financial planning is a necessity in life and must be approached early in life to help an individual make good sound financial decisions to comfortably reach their financial goals.