As a financial adviser who is also the proud dad of a two year old I am already planning how I am going to prepare him for the economic practicalities of life by teaching some financial basics from early on.
Lesson one: the importance of saving!
I definitely don’t want my child to be like 40% of Americans who, according to research from the Federal Reserve, could not afford a $400 emergency. In fact, I’ll be encouraging him to up the ante and put enough by for a monsoon season of epic proportions because if there’s one thing I have learned from being a financial adviser, it’s that life can throw people some serious curveballs which can be very expensive to deal with and quickly send individuals into a spiral of debt which is very difficult to get out of.
Savings goal number one is a rainy day fund, better known in the financial planning world as an emergency fund. This bank of cash should be kept separate from your everyday finances to be utilised if an unexpected emergency situation occurs. We’re not talking an ‘I desperately need a weekend away’ kind of emergency situation but a proper grown up nightmare such as months of unemployment during a recession or urgently required medical treatment. In order for an emergency fund to provide a robust first line of defence against financial hardship when times get tough I would recommend saving enough to cover six months of basic expenses as a minimum.
Of course, once you’re in a saving habit, don’t stop when that first line of defence is in place. You can further protect yourself (and your family if and when you have one) by tackling other areas of your financial planning. Savings goal number two is a retirement fund. I know, my child is only two and I’m already thinking of their retirement fund but it’s a fact that people around the globe are not saving enough for retirement. Added to which, the early bird really does catch the worm when it comes to retirement saving.
Compound interest is the powerful tool which makes a remarkable difference to the eventual size of your pension pot and compound interest needs time to work. Consider this:
If you want to retire at 65 with $40,000 per year to live off, you will need a pension pot of $1million. Start saving at 25 and you can achieve that by saving $400 a month. Wait a decade until you are 35 and you’ll need to double your monthly savings to $825. Leave it until you are into your fifties and savings of $5,600 per month will be required.
That is exactly why I’ll be advising my child to start a retirement fund as soon as they start working and continue to contribute throughout their working life. It is a fact none of us can control what is happening in the economy but we can control our own financial situation and be prepared for when the proverbial heavens decide to open.
I’d love to help you save and invest to protect you against rainy days and monsoon seasons. You can contact me to discuss all your long term financial planning needs including retirement savings, life and health insurance, education fee planning and estate planning.