For most of us, at the start of our adult lives, we have minimal property and possibly some debt from school. But our net worth statement includes a large asset: our future earnings potential. As we age, we turn our earnings potential into actual spending, and fulfillment of our financial goals.
The first thing to do in our early financial lives is to create stability and flexibility. We create stability by making sure that spending is less than income and by reducing debt.
We use life and disability insurance to protect against uncertainty. Flexibility comes when we have set enough cash aside so that we don’t have to borrow to cover short-term emergencies such as temporary job loss or the deductible on our auto insurance.
That all sounds pretty basic and boring, but the next level ups the game on financial goal setting. Now that the basics are in place, you will more fully develop your short and long term financial goals. You’ll start setting aside money for retirement using your employer’s 401(k) and other available plans (such as traditional and Roth IRAs).
Then, think about the other big goals in your life: usually a home, college (if you have kids), and kids (if you have kids). Add an additional layer to your financial protection plan by putting together your estate plan.
As you get older, you’ll get more concrete ideas about what you want your retirement to look like, so your goals will evolve. And, if you do have kids, their preferences and aptitudes will begin to inform your college goal plan, too.
The earlier you start putting together your financial foundation and setting goals, the more success you’ll have in reaching them.