Sensible Perspectives

Financial Planning for Young Adults

Posted by on December 9, 2019

Most of the financial planning industry focuses on advising people at or near retirement with a large amount of financial assets. Modern financial planning evolved from a stockbroker model and still focuses on investment management and most people don’t focus on planning for retirement (their largest financial goal) until middle age.

Ironically, young people may benefit more than their elders from sound financial advice. A 30-year-old can implement changes that can make a material difference to her long-term financial plan. By comparison, when a client comes to us at age 65 to do a financial plan there is not as much they can do to change the picture.

In this and in a follow-up article, I will focus on four financial issues we’ve identified as important to people at all points in their lives: (1) human capital management, (2) living within your means, (3) cash flow and (4) asset allocation. For each issue I’ll provide a brief description and offer some sensible advice that young adults can incorporate into their own financial plans. (You can find a more complete treatment of our financial planning approach here in our Financial Planning Guidebook, which is free to download).

Human Capital Management

Human capital is the sum of your lifetime earning potential. When you’re young, human capital is often your largest asset. As you near retirement it shrinks as fewer earning years remain. Throughout our working lives we convert human capital into financial capital (savings) to fund spending in retirement.


Imagine a 25-year-old who earns $120,000 per year and retires at 66. When she starts her career, she has $3.5 million in human capital – the sum of her future earnings discounted to today. Over time, she saves what she doesn’t spend, converting human capital into financial capital. When she retires, her savings of approximately $1.5 million is enough to fund retirement (there’s nothing special about this number and everyone’s “nest egg” differs – this is simply an example).

Human capital management is the process of handling your earning potential over time. There are several financial planning implications for young adults to consider:

Living Within Your Means

Financial planning is an asset-liability matching problem. People have a certain amount of (lifetime) assets they can use to fund (lifetime) liabilities. Living within your means simply recognizes that you can’t spend more during your lifetime than you have in lifetime resources.

We can extend the above human capital model to include lifetime expenses. Doing so allows us to construct a person’s lifetime balance sheet. This lifetime balance sheet allows us to solve for a person’s lifetime discretionary budget, which is simply the difference between lifetime assets and lifetime fixed expenses.

When you’re young it can be difficult to figure out your lifetime budget. With many possible income and spending scenarios, calculating your lifetime budget can feel overwhelming. Nevertheless, even without perfect knowledge of the future there are things you can do today that will put you in a better position in the future when you are ready to do a full a financial plan.

Cash Flow and Savings

Managing your human capital and living within your means are fundamental to your financial plan. Hopefully the above suggestions provide a useful starting point to tackle these important issues.

In my next article I will discuss cash flow and asset allocation and offer additional suggestions for how young professionals can plan around these issues.