Today at TILE we talked about financial planning and the need to look into the future. In full disclosure, the arrival of my son Carson Bix on March 25th had me thinking about the future in a slightly different way. All of a sudden there were new financial responsibilities, new expenses, and new adventures to look forward to. Major milestones (having kids, graduating from school, or starting a new job) can be driving forces for anyone to consider or reconsider a financial plan. So, why is financial planning such a dreaded topic? What does it really mean? And why is it better to start when you’re young?

When you hear the words “financial planning,” how do you feel? Does it generate a sense of certainty or chaos? Does it feel like your favorite hobby or your worst chore? It’s often the latter – not because each step in the planning process is so hard, but because it’s hard to know where to start. The truth is, there is no single road map for creating, modifying, or following a financial plan. Each individual’s start time (age 20 or age 40), needs (will you work until age 70 or do you want to retire early?), obligations (how big is your family?), and risk profile (are you a Cautious Mover or a Rabble Rouser?) is different, so the plan has to be different from person to person. Kind of like exercising, there are tons of trainers and systems, but not every fitness regime is “one size fits all.”

What does planning really mean, then? There are different perspectives on this, but personally I like to think of a plan as a “road map” for your financial life. Similar to a road trip in a car, it is more efficient (and for most of us more pleasant) to actually have a sense of where you are going rather than just driving around aimlessly. You can always change your destination (or objectives) but you need to start somewhere! When you are in your 20s, the objective of your plan may be to start saving – growing your money for a nest egg in the future. But when you are older, the objective may be to cover living expenses or find efficient ways to leave money to your heirs. Start with your objective (destination) then get into the details around the best way to get there (for example, types of investments and the risk profile of each).

Starting young makes a big difference in financial planning. Beyond the obvious benefit of setting good habits early, it’s just easier and less risky to reach your objectives (kind of like training for a marathon, most people will do better if they start training months, versus weeks, before the race). Compound interest is a really valuable “lesson” in here, too. For example, if you start with $10,000 today and earn 5% interest for 30 years, the future value of your investment would be more than $143,000. However, if you waited and only invested it for 10 years it would be just over $16,000. Feel free to try it yourself with different combinations (we like calculatorsoup.com and our own Compound Interest “Learn To”). The building blocks are simple: time (when you need it), rate (how much risk you feel comfortable taking), and amount (the ultimate objective). Unfortunately, starting new things isn’t always as easy.

So what does this mean for the TILE Community? Well, young adults are in the best position to gain the most by planning early. Just like an intimidating math or science course, once you start learning the lingo and developing good habits, it will seem simple. That said, having someone to help you set the road map is a huge advantage. Financial advisors and/or your parents can help you do that by asking you the right questions (where do you want to go), suggesting the best possible routes (investment options), and helping you stay on track (are you hitting your goals?). Nonetheless, you’re the driver in this car, and it’s ultimately up to you to decide where you are going.

- Amy