Yahoo Finance Why Financial Planning Is A Young Man’s Game
Life has always been biased towards younger people. Younger athletes are preferred over older counterparts while successful entrepreneurs such as Mark Zuckerberg and Evan Spiegel made it big in their earlier 20s. Even games that require focus and experience such as Chess seem to favor younger competitors.
Now add financial planning to that growing list.
The general perception is that financial planning is usually reserved for older adults who are in their 40s. This, however, couldn’t be any further from the truth. In fact, thinking about financial planning only when you are in your 40s is akin to wanting to learn and play professional Texas Hold’em at that age. You can try, but you will lose to the younger guys. And no, it doesn’t happen like the James Bond’s movie.
Why we don’t plan on our finances when we are young
The reason is quite simple. In our 20s, a lot of us do not have much financial worries – especially if we have cushy day jobs paying us above the medium salary of $3200.
The thought of managing your finances might have come across your mind, but that seldom goes beyond the superficial budgeting for a twice-a-year holiday spending spree, or to afford the latest gadgets.
Why we only care about our finances when we are older
The older you get, the better you generally manage your finances. However, that arises from a need to, and not because we want to.
Between getting married, buying a house, having a child or two, realizing that your parents and your in-laws have both retired, having to pay off tons of bills at the end of each month (and the list goes on), you might start to realize that your meager pay rise of between 3-5% annually is insufficient to cope with both inflations and all these additional expenses.
Somewhere during the process, we are forced to learn how to manage our finances better.
Do It When You Are Young, Not Old
Financial planning needs to be done when you are young. Understanding the chart below is all you need to know.
Let us explain the chart.
The chart assumes an investment of $5000 annually, or about $416 a month.
The chart assumes the same return rates (7%) for all three individuals.
Results:
Chris invests a total of $200,000 ($5000 a year for 40 years). His diligence paid off, as he accumulates in excess of $1 million at age 65.
Bill invests a total of $150,000 ($5000 a year for 30 years). Not too bad, you would think. He accumulates $540,000 at age 65.
Susan only invests $50,000 ($5000 a year for 10 years). However, she started her investment between the ages of 25 to 35. She accumulates $602,000 at age 65.
The interesting thing about the analysis is that, despite saving $100,000 more through an additional commitment of 20 years, Bill still ends up with less money than Susan.
The reason is simple. Susan started saving earlier when she was in her mid 20s. She gave up doing so in her mid 30s (we can assume a story where she faced too much commitment in life, and perhaps at times, was not even working). For whatever reason, she just couldn’t save a single penny after she was 35. Even when she had excess money during the year-end bonus, she decides to spend it.
Bill on the other hand, didn’t save much in his mid 20s. We will assume, like a typical young person, that he spend most of his money travelling around the world and enjoying good food. When he got married in his early 30s, the little savings he did have was used up for his home renovation.
When he reached 35, his salary increased. He then wisely decided to start setting aside money for saving and investing. He slogged hard for that, and did an admirable job supporting both his family and his regular investments. In total, he earned more, saved more, and committed more effort towards an investment plan than Susan did over his lifetime.
Yet when they both turned 65, Susan ended up with more money than Bill. This is despite both of them using the same investment plans and receiving the same annual returns. And that is simply because Susan did her saving and investing in her mid 20s to 30s, as compared to Bill, who started at age 35.
This is a good depiction of how financial planning is a young man’s game. If you start young, you can end up doing better than someone who started later, despite putting in lesser effort and earn less money.
The bottom line is that saving and investing when you are young is not only easier, but also more rewarding.
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