Financial Literacy & Independence for Teens - Step 10 - Milestone Planning
KEY POINTS
Empowerment through Education: Invest in education to unlock a world of possibilities, paving the way for a promising future.
Starting a Family and Financial Planning: Navigate the path of family building while making informed financial decisions, ensuring a stable and rewarding life ahead.
Home, Business, and Retirement Planning: Envision homeownership, entrepreneurial pursuits, and a secure retirement as you strategically plan your financial journey toward realizing your dreams.
Congratulations !!!
By patiently working through the nine previous posts on financial literacy and independence, you're embarking on an exciting journey towards reaching significant milestones in your life's adventure.
What are Financial Milestones?
Financial milestones are significant goals or achievements in your financial journey that mark important progress towards building a stable and secure financial future. These milestones serve as guideposts to help you manage your money wisely and make informed decisions.
We'll highlight the prevalent milestones and demonstrate how this guide to financial literacy and independence can play a crucial role in reaching these important achievements.
Common Milestone Elements
Financial milestones can vary depending upon individual goals and circumstances, but there are several common elements that many financial milestones share. We highlight the following:
Goal Setting
Those that set goals are more likely to successfully reach their financial milestones than those that do not set goals.
We highly recommend creating integrated SMART-ER goals as soon as possible.
Specific
Measurable
Achievable
Relevant
Time Bound
Evaluated
Reviewed
Budgeting
Similar to how you probably wouldn't be able to navigate from New York City to Los Angeles without a map, it's improbable that you'll achieve your financial goals without a well-planned budget.
A realistic budget can provide financial freedom while reducing stress.
Budgets are not one-size-fits-all. It is imperative that you find an approach to budgeting that works for you. One of the following approaches to budgeting may be just what you need to get started.
Pay Yourself First
Zero Based Budget
Envelope System
70/20/10 Budget
Intervention System
Consistent Saving and Investing
The process of building wealth generally demands a steady strategy for saving and investing. The concept of compound returns holds considerable potential in propelling you towards your financial objectives.
Deferring the initiation of your savings and investment activities may potentially bring about future cash flow constraints or compel you to seek exceptionally high returns to meet your goals.
For example,
An accumulation of $1,000,000 for retirement could be achieved through a monthly savings allocation of roughly $502 over a period of 40 years, coupled with an annual rate of return of 6%.
Reducing the savings duration to 20 years results in the monthly savings requirement increasing by over fourfold to $2,164.
Long-Term Perspective
The timeframes for your financial milestones will differ. For example, you might have savings goals for purchasing a home and securing your retirement, with timeframes of 5 years and 45 years respectively.
Each milestone will probably involve distinct levels of risk tolerance and financial needs. These factors will directly influence your budget, cash inflows and outflows, investment allocation and diversification, and other aspects.
Maintaining discipline and patience is crucial as you remain dedicated to achieving these objectives over such extended periods.
Adaptability and Flexibility
Life is full of uncertainties. Your financial situation is bound to undergo alterations. On occasion, you'll have a say in these changes, while at other times, you'll find yourself at the mercy of external factors, market dynamics, and sheer chance.
Maintaining adaptability and flexibility is crucial to responding effectively to unforeseen expenditures, shifts in the market, employment setbacks, health challenges, and various other circumstances.
No more holding back – it's time to dive right into those crucial milestones.
Milestone #1
Post-Secondary Education / Skilled Trades
Align your career goals with a program offering essential skills. A post-secondary education can help you secure a top job and enhance your ability to build wealth.
When selecting a college or university, consider programs, facilities, faculty, and resources that are complimentary in nature for a comprehensive education. Location, cost, extracurriculars, and the institution’s reputation matter too.
Secure funding for your desired education through budgeting, savings, grants, and part-time work. The earlier you begin saving, the more the force of time and compounding works in your favor.
Educational costs can be overwhelming to even the most diligent savers. Consider exploring more affordable options like community college or online courses to diversify your path to success.
Milestone #2
New Car
Obtaining a new car is a significant milestone for young adults, especially recent graduates. While it might seem customary, it's wise to pause and take a long-term view. Consider how a new car fits your financial goals.
First, assess if owning a car is truly essential. Public transport and car-sharing apps can often fulfill your travel needs cost-effectively. If a car is necessary, remember that cars almost always depreciate, a vital but often overlooked financial aspect.
Depreciation does not impact your cash flows on a weekly or monthly basis. Rather, it becomes evident when you sell the car and find its resale value much lower than the purchase price.
On the positive side, new cars offer advanced tech, safety features, the ability to personalize, along with warranties and increased reliability.
Payment options include cash, auto loans, personal loans, and leases. Compare these carefully as interest rates can vary dramatically. Extending the loan term lowers monthly payments but increases interest costs.
For leasing, understand the specific maintenance, mileage limits, excess mileage penalties, and future buyout terms related to proposed contract.
Regardless of how you finance your car, factor initial and ongoing costs into your budget – down payment, payments, gas, maintenance, and insurance.
Choosing new or used car depends on your lifestyle and financial goals.
Milestone #3
Homeownership
Homeownership signifies a significant step towards lasting financial stability. It's not just about finding a place to live; it requires thoughtful planning, considering your current and future finances, and understanding the responsibilities it entails.
At the core of wealth management, homeownership enables individuals to accumulate equity over years via mortgage payments and property value growth. Despite its historical stability, real estate markets have demonstrated dramatic fluctuations, such as during the Great Recession (2007-2009), leading to notable losses.
Remember, in the realm of investments, nothing is guaranteed – homeownership is no different.
Tax incentives, forced savings, and rental income boost homeownership's role in wealth accumulation. It aids intergenerational wealth transfer and diversifies investment portfolios, highlighting its lasting significance in wealth accumulation strategies.
Your budget directly affects where and what you can afford. Consider mortgage, taxes, insurance, and maintenance. Reduce your risk by establishing an emergency savings fund and prioritizing a home inspection before you finalize the purchase of your dream home.
Financial institutions will assess your financial profile and determine the maximum potential lending they will extend to you, which might exceed your budget. Your own calculations should guide borrowing limits while allowing you to avoid excessive debt.
A larger down payment reduces monthly mortgage and overall loan costs. A down payment of 20% or more may avoid mortgage insurance and provide lower interest rates. Elevated credit scores also lead to reduced interest rates; assess and improve them before seeking a mortgage.
Choosing fixed or variable rate mortgage is pivotal. Fixed offers stability with constant payments; variable starts lower but fluctuates. Decide based on risk tolerance, long-term goals, and market conditions.
It can be difficult to decide if you should buy or rent your home.
Buying a home is a significant financial commitment; consult a financial advisor or mortgage professional for personalized guidance.
Milestone #4
Wedding
A wedding symbolizes a monumental milestone. It is a time-honored tradition that unites two individuals in the presence of family and friends while blending cultures and religions during a memorable celebration.
Careful financial planning is required to bring this event to fruition. Projected expenses should be anticipated and integrated into your budget, striking a balance between your dream wedding and concurrent financial aspirations. Yes, this is easier said than done.
Costs, encompassing invitations, decorations, venue, catering, and more, can rapidly escalate. The guest list can significantly influence costs, exacerbated by familial dynamics and expectations. Similarly, family and friends might impact destination decisions (e.g., Caribbean beach wedding) introducing potential conflicts.
A financial advisor can become indispensable as your dream wedding competes with other financial goals like homeownership and education. Their insight merges competing objectives into a financial blueprint, showing the impact of even minor adjustments on long-term goals.
Hiring a wedding planner could also prove advantageous. Despite the initial cost, their skill in securing budget-friendly deals, crafting cost-effective designs, and navigating familial dynamics can save both money and emotional strain, leading to a harmonious and memorable celebration.
Adaptability is crucial throughout the process, as numerous variables are beyond your direct control. Weather changes, vendor issues arise, and unexpected disruptions are par for the course.
In essence, orchestrating a wedding necessitates precise financial groundwork that harmonizes expenses and cultures. Professional guidance becomes prudent for navigating intricate family dynamics while seeking fiscal responsibility.
Collaborating with a financial advisor aligns monetary aspirations with broader life objectives. Furthermore, a skilled wedding planner simplifies arrangements and cost management. Remaining adaptable is key, given potential unforeseen obstacles as you approach your dream wedding celebration.
Milestone #5
Raising Children
Is there any milestone more important than raising children?
Parenthood brings a myriad of joys, challenges, and responsibilities. This transformative journey reshapes priorities, goals, finances, and your ability to accumulate long-term wealth.
When contemplating parenthood, acknowledging short and long-term costs is pivotal. Immediate expenses include, but are not limited to, pregnancy, medical care, essentials, and potential work leave. Long-term outlays encompass education, healthcare, extracurriculars, and ongoing financial commitments.
Creating a support network of family, friends, and community resources mitigates both financial and emotional strains. Shared child-rearing roles, childcare exchange, and access to cost-effective parenting tools enhance cost management.
Education stands as a paramount financial commitment in child-rearing. Covering the span from preschool to higher education, funding a child's learning journey demands substantial resources.
We recommend commencing long-term financial planning as soon as possible. Preparing for tuition, supplies, and potential student loans improves the likelihood of meeting financial objectives and fulfilling your child's educational aspirations.
Governments may offer substantial assistance for higher education, including fund matching, tax advantages, and student support. Nevertheless, such rarely covers the entire financial requirement; therefore, it's judicious to provision for extended expenses.
Designated government savings and investment accounts earmarked for education are a prudent vehicle for setting aside funds. Additionally, establishing separate savings and investment accounts exclusively for education streamlines financial tracking.
While budgets are indispensable, life's uncertainties necessitate a prudent approach. Planning for the best while preparing for the worst can be achieved through the following steps to mitigate the risk of significant financial setbacks.
Emergency Fund
Maintaining an emergency fund equivalent to 3-6 months of living expenses proactively reduces the potential risk of debt accumulation due to unforeseen costs or sudden unemployment.
Budget
We consistently refer to long-term budgeting in this article. Failing to formulate and adhere to a budget can lead to overspending, debt accumulation, and financial adversity. Scrutinizing discretionary expenses and minimizing their growth is paramount.
Excessive Debt
Excessive debt can yield untenable payments that jeopardize your ability to save for your child's future. Such debts typically bear high interest rates and encompass credit cards, payday loans, or personal loans.
Parenthood brings forth lifestyle adjustments affecting daily routines, careers, and leisure pursuits. Anticipating these shifts enables appropriate adjustments to financial planning. Prioritizing expenses aligned with family values and minimizing discretionary spending cultivates financial equilibrium.
While financial considerations are pivotal, qualitative facets profoundly influence parenting choices. Balancing emotional well-being, personal fulfillment, and the intangible rewards of parenthood with financial costs is essential. Striking a harmonious equilibrium between these factors contributes to a comprehensive and gratifying parenting journey.
While raising children incurs substantial costs, it concurrently yields long-term financial advantages and contributes to legacy creation. An investment in a child’s education and personal development holds the potential to alleviate future financial encumbrances.
The addition of teaching prudent money management, and robust values to successive generations enriches both your family's heritage and financial legacy.
Milestone #6
Starting Your Own Business
Starting your own business is a significant milestone that is full of exhilarating opportunities and daunting challenges. It marks a pivotal point where your ideas, skills, and passion converge to create something uniquely yours.
While the allure of entrepreneurship is captivating, comprehending the financial intricacies and foreseeing potential personal compromises is imperative.
Securing funds, cost oversight, prudent fiscal judgment, and delineating personal space for loved ones are pivotal facets influencing your venture's trajectory and your personal quality of life.
A new business venture necessitates a spectrum of fixed and variable outlays. Critical enhancements to your product or service will require investments in research and development, constituting substantial and continuous fiscal commitments.
Strategically allocating resources to human capital and technological enhancements holds the key to attracting and retaining skilled personnel and maintaining competitiveness in the digital realm. Additionally, requisites like premises acquisition or rental will have a significant impact on your operating budget.
Skillful budgeting entails a comprehensive strategy aligned with long-term financial objectives. Distinguishing between essential growth-driving expenditures and those that can be optimized is paramount.
Striking equilibrium between business investment and personal financial stability is pivotal. Periodic reassessment of your budget to reflect changing circumstances is fundamental.
Most ambitious entrepreneurial endeavors require multiple rounds of financing to address immediate and long-term requirements.
Short-term demands involve creating a robust business plan, crafting financial projections, engaging investors, recruiting talent, fostering research and development, and more. Meticulous planning ensures your business proposition is well presented.
In the long-term, securing funding can lead to repayments, interest, or the issuance of equity shares to satisfy investors.
Diverse financing avenues include traditional ones like bank loans, personal savings, and family support. Angel investors and venture capitalists offer funding for equity, while crowdfunding platforms gather funds from diverse backers. Government grants, competitions, and accelerator programs provide financial backing and guidance.
Navigating entrepreneurship demands an astute understanding of potential pitfalls.
One common mistake is underestimating initial costs, leading to inadequate operational funds. Overspending on non-essential facets or neglecting to prepare for unforeseen circumstances can disrupt your business's viability.
You must always be cognizant that there is life beyond work.
It is easy to fall into the trap of reacting to each new issue like it is a full-blown emergency.
“Most of us spend too much time on what is urgent and not enough time on what is important.”
Apart from financial considerations, commencing a business entails managing qualitative aspects. Balancing entrepreneurship with personal relationships and well-being requires transparent communication. Sharing potential challenges and setting boundaries with family and friends maintains a healthy work-life equilibrium.
Adaptability is vital, given the inevitability of setbacks and uncertainties. Contingency plans safeguard both financial health and personal well-being. A proactive approach aids strategic problem-solving and adaptability, ensuring business and personal welfare.
Entrepreneurs often tackle multifaceted challenges. Surrounding yourself with experienced peers, mentors, and advisors is indispensable. Their insights, guidance, and connections bolster financial decision-making and growth.
With the right approach, financial acumen, advisory network, and dedication to work-life harmony, entrepreneurship can be a very rewarding experience.
Milestone #7
Retirement
Retirement planning can seem overwhelming, especially for young adults facing competing life ambitions and limited budgets. Yet, recognizing that time is your ally is crucial, as today's financial decisions profoundly impact your future quality of life.
Change is constant in life, whether through career shifts, family milestones, health challenges, or unforeseen events. Embrace these changes and build a flexible financial foundation to meet your immediate and distant retirement goals.
Consideration of the following is a great place to start. Realize that retirement planning is complex and will likely require advice from a professional advisor to navigate these issues.
Retirement Income
Estimate your income from various sources including government pensions, work pensions, annuities, and other investment and savings accounts.
Assess Current Expenses
Review your current budget and develop a deep understanding of your expenses (monthly, quarterly, annual) and related spending patterns. Be sure to differentiate between discretionary and non-discretionary expenses.
Disappearing Costs
There are several cash outflows that will be reduced or eliminated in retirement. Such may include children’s educational expenses, transportation related to commuting, work attire, and cash flows to fund retirement.
Estimate New Costs
An increase in leisure time may lead to an increase in travel and entertainment expenses.
Retirees should anticipate an increase in costs associated with healthcare and medical costs. Such may include insurance premiums, deductibles, co-pays, prescription drugs, and potential long-term care needs.
Housing
You may experience one or more of the following: downsizing, home modifications required for aging in place, or long-term care homes due to medical or social considerations.
Downsizing can lead to decreased maintenance expenses, reduced property taxes, unlocking of equity, and a more streamlined way of life.
However, such decisions may generate significant transactional expenses, limit your ability to accommodate guests, reduce space for pursuing hobbies, and more.
A real estate professional and a financial advisor can assist in striking a balance between your financial needs and practical requirements.
Inflation
Inflation is a critical factor to consider, as it erodes your purchasing power and wealth over time. While most retirement models incorporate an annual inflation rate of 2-4%, recent events like the COVID pandemic have shown that inflation rates can surge to double digits quickly.
Return on Investments
Managing investments is essential, with risk typically decreasing as you age. Engage a financial advisor to develop a realistic financial model that aligns with your risk tolerance while generating returns exceeding inflation.
Taxation
Taxation during retirement is a crucial consideration for financial planning. It can become complex quickly and require a professional advisor to ensure that you optimize your after-tax income.
Retirement accounts (e.g., 401K , IRA, RRSP, TFSA) can offer tax benefits, with contributions often being tax-deferred or tax-deductible, but withdrawals are typically taxed as ordinary income. Diversifying retirement income sources can help manage tax liabilities.
Additionally, certain tax credits and deductions might be available to retirees, underscoring the importance of a well-rounded tax strategy in retirement planning.
Review and Realign
Regularly reviewing and adjusting your financial plan is crucial because life is ever-changing. External factors like illness, inflation, and interest rates can impact your financial circumstances. With expert guidance, you can navigate these challenges effectively.
Avoiding common financial mistakes is vital for a secure retirement.
5 Mistakes to Avoid
Relying Solely on Social Security
Relying solely on Social Security is risky; develop additional income sources early like an investment account, tax-deferred accounts, or company pension. Be sure to consider potential penalties and incentives related to the timing of your withdrawals.
Underestimating Expenses
Underestimating expenses, whether in healthcare, travel, hobbies, or housing, can strain your finances. Prudent financial planning includes factoring in these costs and maintaining a comprehensive budget.
Overly Conservative Investments
Being overly conservative with investments can limit your growth potential. Work with a financial advisor to create a diversified portfolio that aligns with your long-term goals and evolving risk tolerance.
Poor Budgeting, Excessive Debt, and Taxation
We cannot stress enough the importance of creating a comprehensive budget and sticking to it. It is a living document that should be reviewed regularly and amended as required.
Maintaining a disciplined budget is essential to avoid unnecessary debt during retirement. Avoid impulse spending on discretionary items.
Unexpected tax bills can also lead to debt. Not all sources of income are taxed at source. Consider the tax implications of your income sources and plan accordingly to meet your tax obligations.
Supporting Adult Children
It may be admirable to provide financial support to your adult children; however, excessive support can be detrimental to your retirement. Revert to your budget and ensure your emergency funds, non-discretionary expenses, and lifestyle are not compromised by such financial commitments to your children.
While financial aspects are crucial, don't overlook qualitative factors.
Emotional and psychological preparation for retirement is vital, as transitioning from a structured work routine to unstructured leisure time can be challenging. Staying socially engaged, pursuing hobbies, and maintaining a sense of purpose contribute to overall well-being during retirement.
Flexibility is key when planning for retirement. Life is unpredictable, and circumstances may change unexpectedly. Having a flexible financial plan that adapts to new situations, such as market fluctuations, unexpected expenses, or shifts in personal goals, will help ensure a more resilient retirement strategy.
BOTTOM LINE
Our ambitions shape key milestones that demand a lifelong commitment to strategic financial planning and stewardship. From investing in education for more opportunities, to acquiring a vehicle that propels us forward, each step reflects financial acumen.
Marital commitment precedes the rewarding challenge of nurturing a family, demanding fiscal prudence. Homeownership offers not just shelter but often provides the cornerstone to building wealth. Entrepreneurship may be a key factor in your long-term plans and require a unique skillset.
Lastly, retirement planning ensures stability in our golden years.
With strategic planning, these landmarks symbolize chapters in a well-lived life.
