Millennials! Here is Why You Need A Financial Plan (And 3 Steps To Get You There)

If you’re a Millennial, this is an amazing time in your life. You’re in your twenties and early thirties. You are actively discovering who you are and who you want to be, professionally and personally. As you think about the future and take steps towards achieving your dreams, there’s one thing you may be overlooking: your finances.

Some of you are dealing with student loan debt. Others are in full time jobs that offer 401k and other financial perks. An education does not necessarily prepare you for being smart with your money. So trust me when I tell you about the very minimum that all millennials need to start doing:

MAKE A FINANCIAL PLAN

Your financial plan is not just about surviving in later years, but about thriving throughout life. It forces you to make decisions that you might never have thought about when your plan was just in your head. Did you realize that you need to manage your money for 60 years? A plan helps you to extend yourself past the limitations of thinking only of short-term goals. Writing out your financial plan also helps you conquer the tricks that your mind and the stock market can play on you.

Over my years of teaching this subject I would say that only about 1% of people truly have a written financial plan. So whip out an index card or Post-it note and get ready to become one of the 1%. Here’s how to get started:

1) Simplicity. A simple plan followed is infinitely better than a complex, comprehensive, plan being shelved. Write your plan on a napkin or an index card, rather than typing it up or using a big piece of paper so that you won’t be tempted to add unnecessary details or complexities. Don’t be intimidated!

2) Consider the following six areas:

– Your investment and retirement horizon
– How much money you will need
– How much to contribute on a regular basis
– What risk and return to expect
– Your asset allocation
– Monitoring and rebalancing plan

These will be the six chapters of your financial plan.

Let’s get specific! So say you are 22 and you want to be financially independent at age 60 and you expect to live a happy life until you’re 90. This means your investment horizon is 38 years (60-22), so you have 38 years to acquire enough wealth to be comfortable in retirement. As you expect to live until 90, your retirement horizon is 30 years.

Next step is finding out how much money you will need to do this. Say you are making $35,000 today, and since you’re quite early on in your career you might want to keep this same income when you retire. You assume that long term stock market returns will be 8% and long term bond market returns 4%. You expect inflation to be on average 2% and you currently have $10,000 in savings.

To achieve this goal you would need to invest about $540/month or about 20% of your current salary for the next 38 years. If you do so, you can lay back and start living on interest at the age of 60 and for the rest of your life.

3) Follow that plan. This is probably the hardest step, but also the main benefit of a written plan. To keep you disciplined in your savings and investment decisions. It’s my honest belief, that anyone can become financially independent by simply start investing with discipline at a young age.

Congratulations! Just by writing a simple financial plan you have joined the ranks of the 1%. Refer back to your plan often, and let it guide you toward your goals and the life that you want to lead.