Some people find the activity of financial planning enjoyable, while others are terrified by it.
Both responses are normal. But if you find yourself with sweaty palms at the idea of financial planning, take heart!
Financial freedom and security don’t happen by accident. You need forethought and discipline to navigate the chaos of life—and finances. If you don’t tell your money where to go, it will slip through your fingers like sand.
Financial planning is an essential activity that will help you improve your quality of life and maintain it as you grow older.
In this article, we’ll look at the practice of financial planning related to the milestones you will likely think about as you age. Keep in mind that we’ve structured this guide according to how people generally think about their financial life—you’ll walk your own financial path.
What Is Financial Planning?
Although the phrase seems straightforward, “financial planning” can feel like an overwhelming idea. Let’s take a step back and use meal planning as an analogy.
When you build a meal plan for a week, you take a look at the groceries you have, the food you still need to buy, and the meals you’re going to make and eat for the next seven days.
You’re feeling hungry for tacos, but might need to wait until payday to buy the rest of the fixings. So, you look through the fridge and the pantry to see what you have. Then you pick the recipes based on your inventory.
Financial planning works the same way.
A strong financial plan is a document that shows your current financial situation (including income, expenses, and debt), and your financial goals (how much money you want for retirement, how much debt you want to pay off).
It also includes the strategies you’re going to use to achieve those goals (find a better job, pick up a side gig, move to a cheaper neighborhood).
While financial planning doesn’t have to be complicated, it does require that you pay attention to your actual financial numbers and build a plan based on reality, not where you hope to be soon.
Failure to plan can have devastating results.
According to data from a 2022 survey, only 23% of Americans have a written plan for retirement, and only 22% say they have enough money saved for retirement. That puts the majority of people at the mercy of Social Security in their old age—and the Social Security Fund is in bad shape unless Congress takes dramatic action.
Early Adulthood Financial Planning Milestones
Unless you’re a rare sort of child, you probably won’t start actively planning your financial life until around age 20.
For most people, the years between 20 and 35 follow a predictable pattern.
You see similar milestones to your peers and deal with similar challenges. Here are some of the things you should consider as you build a financial plan for early adulthood.
Education and Career
By the time you reach age 20, you’ve probably had at least one part- or full-time job and learned the basic rhythms of getting paid, covering some living expenses, and watching the government take its share.
At this point, roughly 60% of Americans will enroll in college and figure out how to pay for it. This can include savings, scholarships, and student loans. Paying for college is a huge undertaking: The more strategic you are, the lower your stress will be as you enter the workforce and start building a family.
Post-college is where most people’s careers start. Although entry-level positions may not pay well, they’re an important stepping stone to better opportunities. Even if you have little work experience, you should still practice negotiating your salary and benefits—no one else is going to do it for you.
This is also the easiest time to take risks and pursue opportunities that excite you.
Financial Foundation
This is the best time to learn the basics of budgeting and living below your means. Although it is when most people earn the lowest income of their professional lives, it is also when most people have the lowest expenses.
Young adults face a difficult tension between their carefree lifestyle and the discipline required to make a financial plan and stick with it.
It’s good to develop habits such as saving as well as taking steps to build your credit history in small, responsible ways.
Major Purchases
As young people emerge from school and enter the workforce, they also begin thinking about major purchases, such as their first car or home. Some will choose to finance these purchases right away, while others may save a down payment to help reduce the debt burden.
While the U.S. housing market seems relatively stable, it’s more important to look at your regional market. Rent and mortgage payments are frequently the largest single expense in any budget. Owning a home can also be a powerful way to protect and grow your net worth.
In either case, the key is to weigh your proposed expenses against your income and the goals you laid out in your financial plan—be willing to start small and expand your goals as you go.
Mid-Life Financial Planning Milestones
For the mid-life phase, ages 35-55, you’re probably ready to tackle some bigger challenges.
Not everyone plans ahead for big life events such as marriage and starting a family—or less desirable events such as divorce. You may find yourself tackling these financial milestones on the fly, which is perfectly normal too.
Whatever level of planning you can do is better than no planning at all.
Relationships and Family
Saving for a wedding if you’re not in a serious relationship might be a little premature, but that depends on your progress toward other goals, such as paying off student debt.
That said, when you start to plan for life with a long-term partner or spouse, it’s good to consider topics such as combining finances, creating a budget together, saving for a wedding, and buying a home.
If you decide to have a family, you’ll also consider the cost of pregnancy, birth, childcare, and early education.
There are lots of ways to approach the financial aspect of having a romantic partner and starting a family—sometimes, these events take priority over other financial goals that you had as a young adult. The best financial plans are flexible when the situation calls for it.
Investing and Wealth Building
By this point, you might have some money in a retirement account and have built some equity in your home. The mid-life phase is the right time to take stock of your net worth, and take a look at your investment portfolio.
You might consider renovating your home or condo to increase its value, in which case you should compare the cost of financing the renovation or doing it yourself on the cheap.
Stocks and house prices rise and fall, but the U.S. economy has continued to grow over the long haul. That’s why it’s usually best to be patient during a downturn—the recovery is usually worth it.
Retirement Planning
The best time to start saving for retirement is in your early twenties. The next best time is now.
Whether you choose a 401(k), IRA, Roth IRA, or one of the handful of additional retirement savings vehicles, it’s a good idea to study the differences and choose the one that fits your financial plan.
Of course, if your employer offers 401(k) matching, then it’s a good idea to take advantage. It’s a great way to maximize your salaried compensation and prepare for retirement.
Whether you’re saving up a nest egg, building an investment portfolio, or optimizing your retirement account, the goal is to let compound interest work for you (i.e., interest on the initial principal and on the accumulated interest from previous periods). The longer you let it work, the more money it will create for you—and you don’t have to do anything except leave it alone.
Later Life Financial Planning Milestones
As you move beyond the age of 55, life tends to shift dramatically.
Your children (if you have them) are increasingly independent, your professional career is nearing its peak, and your income is likely the highest it’s ever been.
You also might be ready to enter a slower pace of life, enjoying the fruits of your labor while you’re healthy enough to stay active. Financial planning at this stage is primarily about adjusting your living expenses to fit within your retirement income and getting your estate in order.
Retirement Transition
Americans’ life expectancy is well above the age of retirement, which means that most people need to plan carefully for the phase of life when they no longer work full-time.
This could mean delaying your Social Security payments to maximize them or continuing to work part-time to supplement your income.
This is also a time when many people sell their houses and downsize to something more affordable. The goal (we talked about this in the young adult stage) is to bring expenses below income, especially because the income from investments and retirement funds are mostly fixed.
Estate Planning
The key to a more peaceful final stage of life is to make the hard decisions before you’re forced to make them.
An estate planner can help you arrange things ahead of time, easing the burden on you and your loved ones. It may feel ominous, but it may help to view it as another expression of your deep care for your family.
This stage of financial planning also includes arrangements for long-term care, if needed, and associated costs. The goal isn’t to expect the worst but to make tough choices while you’re at your best.
Legacy and Philanthropy
If your financial planning has reached its full potential, you may be leaving behind at least some money. For some people this is a matter of leaving your family with a generous gift. Others may wish to set up trusts and charitable contributions to create a legacy for future generations.
Late-life financial planning allows you to actively choose where your remaining funds should go and how they should be used in your absence.
Even if you aren’t leaving a huge inheritance, you can still leave a lasting legacy by having your affairs in order—leaving your loved ones to dwell on your memory instead of wrestling through your estate.
Financial Planning Tips at Every Stage
If you’re the type of person who loves to be spontaneous and feels trapped by the idea of a rigid financial plan, consider that planning can create stability that allows more freedom.
There isn’t a single or best way to plan.
Basic financial planning, such as budgeting and setting short-term goals, is far better than no plan at all. As you build your confidence and success rate, you may discover a joyful side to financial planning.
Especially if you can find tools like Kudzu that simplify and automate your process.
When You Plan to Grow, You Can’t Help But Win
The pillars of sound financial planning hold true for everyone: Managing expenses and debt responsibly, protecting your assets, and leaning on the advice of professionals.
Above all, you need to identify a driving purpose to help you push for your goals when life throws you curveballs.
At its most basic, a financial plan is a plan to grow, a plan to use your resources smarter every month and year. And when you take this approach, the results will astonish you.
At Kudzu, we believe that everyone should have the opportunity to reach financial freedom and stability. That’s why our app is designed to help you move forward, no matter where you are in your financial journey.
With a good plan and a little help, anything is possible!
