Wednesday, April 17, 2024

First stage planning

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TODAY WE CONSIDER in detail how to go about financial planning for the first stage of financial life –  when one is young and dependent, say, commonly between birth and 25 years old.  
During this period babies grow into young adults, becoming more and more independent normally. Just keep in mind that one’s financial stage in life in not about one’s age but rather about the stage of development of one’s finances.
This stage of financial planning and goal setting is dominated by the need for teaching and guidance, an essential parenting element. This “parenting” may be done by the parents, guardians, teachers, mentors or even friends. Children are dependent on such people to show them the role and value of money in their lives. It is during this phase that the most important rudiments of earning, saving, spending, investing and giving of money or value is learnt.
As the child gets older, typically he yearns for independence. Sometimes this involves the young adult undertaking student loans and other credit. It is towards the end of this stage that the child starts a work career, opens a personal bank or credit union account and may get the first credit card.
Planning in the latter part of this stage is centred around finding a well paid job, buying a vehicle, finding a soul mate, possibly undertaking graduate studies and exploring some other parts of the world.  Yet, young adults in their early 20s tend to have more plans than money; cash is scarce. Credit is usually attractive for them to access those things that they have longed after. Enjoying their youth is of prime importance.
Yet, the sooner they grow to appreciate the importance of early savings and investing, the better. Here are four tips for successfully passing this stage and moving towards the second stage:
1. Carefully keep track and manage your debt. This is the stage where your needs will well outstrip your earnings. It would be clear folly to commit to a savings plan yet have untenable debt.
2. Start by saving at least five per cent of your net pay, preferably ten per cent, in a credit union account that will give you at least four per cent interest compounded annually. These savings should only be drawn from for dire emergencies. Let this amount saved be the basis of starting a longer-term investment eventually.
3. If your employer does not have a retirement plan, establish a personal Registered Retirement Saving Plan. The recommended contribution is five per cent of your gross annual income per year. In due course, this plan may be drawn on if necessary to help finance your first home.
4. Ensure that you have health insurance, either through your employer or some other group plan which keeps the cost manageable. Typically, health insurance can be accessed through a credit union.
Early savings while you are young ensure reasonable financial stability right through to retirement, through all stages of financial life, your long-term goal.
• Louise Fairsave is a personal financial management advisor, providing practical counsel on money and estate matters. Her advice is general in nature; readers should seek personal counsel about their specific circumstances.

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