Why You're Never Too Young to Have a Financial Plan

A financial plan is one of the most powerful tools that you can use to reach the various financial goals you may aspire to throughout your life.

And yet, it’s common for many younger individuals to believe that they don’t have enough money to justify creating a financial plan — or that they’re simply too young to need one. The misconception may stem from the fact that as you accumulate wealth, financial planning can become quite complex.

But the truth is, everyone can benefit from some level of financial planning, regardless of how much money you have or your age. Below, we review what a financial plan is, what it’s used for, and how even younger individuals can benefit from taking the time to create one.

What is a financial plan?

A financial plan outlines your financial goals and provides you with recommended steps you can take to reach them.

“A financial plan combines a snapshot of where you are today with recommendations for getting where you want to go,” says Jennifer Raess, CFP®, Advice Integration Lead at Northwestern Mutual. “You can think of it like a roadmap for your finances that takes into consideration both your long-term and short-term goals.”

For many people, the simple act of creating a financial plan is a valuable experience because it forces you to think about and articulate your goals — sometimes, for the very first time.

The specific steps you take to get from where you are to where you ultimately want to be will naturally depend on your goals and your current financial situation. Common starter goals might include:

• paying down debt
• building an emergency fund
• protecting your finances
• saving and investing for your future
• planning for retirement
• starting a business

Or you may have something else entirely in mind. Either way, a financial plan will provide you with a realistic map for getting there.

The value of starting early

While taking the time to establish a financial plan is a valuable exercise regardless of your age, it can actually be more valuable the younger you are.

“The sooner you start, the more opportunity you give your money to compound and grow over time,” says Raess. “This is especially true for when you start getting into saving and investing for long-term goals like retirement.”

To put this into perspective, say that at age 30 you decide to begin investing $500 every month into a diversified investment portfolio. If that portfolio earns an annualized rate of return of 6 percent each year until you retire at age 67, you’ll have a nest egg of more than $815,000.

Now, imagine that you establish a financial plan and start investing the same amount when you are 25 years old instead. If all else remains equal, simply starting five years sooner will give you a nest egg of $1,134,000. You spent an additional $30,000 on savings, but you have $320,000 more in retirement.

Raess also notes that most financial plans will include recommendations for various forms of insurance, such as disability insurance and life insurance, which are designed to protect your income and family.

“Generally speaking, the younger and healthier you are when you purchase coverage, the less expensive your premiums will be,” says Raess. “And if you are able to lock in your rate when you purchase coverage, you could end up getting more coverage at a better cost than you would if you wait until you're older."

Not a set-it-and-forget-it kind of thing

Your financial plan is not something that you should establish once and then never touch again. Raess advises checking in on your financial plan about once every year. It’s important to revisit it periodically to check in on your own progress and to see if anything needs to be adjusted. After all, your financial situation and personal goals will likely change over the years.

Other times that it makes sense to revisit your financial plan include when your goals change, when your income changes, when you want to start or expand your family, when your retirement plans change, or when you receive a sudden windfall such as an inheritance or an especially large bonus.

You don’t have to go it alone

If you’re intimidated by the thought of pulling together a financial plan on your own, you might consider working with a financial advisor who can help you every step of the way.

A skilled financial advisor will start off by asking you a series of questions about your current financial situation and the goals that you would like to work toward:

• What do you want most out of life?
• What are you willing to compromise on?
• What are you not willing to compromise on?
• What does your existing budget look like?
• Do you expect your salary to change (either up or down) in the short- or long-term?

They will then use this information to craft a financial plan that is unique to you, outlining key steps to get you where you want to be.

Information is provided for educational purposes only and is not a recommendation for any particular investment. All investments carry some level of risk including the potential loss of all money invested. No investment strategy can guarantee a profit or protect against loss.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.