With lives becoming increasingly busy, it's so easy to neglect your personal financial planning, not giving it time and thought. If you're a young person you may have had very limited access to financial education through school and university curriculums. However, with the right information you can change your financial future. Our Private Wealth Manager, Anna Gratwick, shares some of her top tips for young people trying to get their finances in order.
Taking control of what you have is a good start. It’s really important to have an understanding of all the benefits you have through your employer and this is something you should be looking at and discussing with prospective employers. The schemes you can join through your work may reduce the amount of personal cover and planning that you need to do. If you do not know what you are entitled to, ask your HR department.
If you've taken out protection policies in the past and you're not sure they're still appropriate, review them. Circumstances will change really quickly at this stage in your life so there is no point in paying into something if it is no longer appropriate.
What do you earn and what do you spend?
We can all be guilty of not knowing what we are bringing home, each month, after tax and importantly, what we're spending. Without a good understanding of this, how can you possibly know how much you can afford to spend or save?
Look at your expenditure in detail and break it down into basic spending such as your mortgage or rent, utilities, commuting costs, food etc; discretionary spending so things which are nice to have but not a necessity e.g. gym costs, meals out, socialising etc. and luxury spending such as holidays and big days out. Always build in an amount of ‘contingency spending’ so that items such as birthday presents or unexpected small costs do not throw off your budget and you do not need to break into your savings to pay for them.
Small changes really do make a huge difference. Things like buying your lunch every day at work can really add up and you'll soon find you're spending large amounts of money with very little to show for it. Can you take your lunch to work a few times a week or buy cans of juice to keep at your desk in bulk rather than buy single cans every day? Maybe you could limit your take away coffee to a Friday morning as a reward for getting through the week or buy a reusable cup and most coffee outlets will now offer you a discount for using that.
If you have money in your account at the end of the month, don't look at it as an excuse to go on a shopping spree but instead, sweep it into your savings and start afresh on the 1st of the new month knowing you have put a little bit extra away.
We have all read the headlines forewarning us that Millennials are doomed to work until they are 75 and even then will have a very frugal retirement. This leads to a lot of young people panicking and thinking they need to put every spare penny they have into their pensions. However, there is a lot more to being financially sound than having a big pension pot behind you.
If you've accumulated debt with interest rates in double figures, your priority should be to clear this first. If you're being charged 36% interest on a credit card and earning 1% interest on a savings account, then the maths does not add up. There is very little point in trying to save large amounts in savings accounts if you have this sort of debt accumulating as the longer it takes you to pay off, the more you will owe. Re-direct your savings payments to paying off the debt and clearing it quickly.
It’s important to have a cash pot behind you and at this stage in your life, you may be thinking about saving for a deposit, a wedding, a fantastic holiday or starting a family. Shop around for interest rates and don't just settle for the account offered by your bank that holds your current account. Most accounts with competitive interest rates can now be opened, operated and closed online so it shouldn't even mean you have to spend your lunch hour standing in a queue at the bank. If you're saving for a house, make use of the help to buy ISA and take mortgage advice.
We all have warranties and repair policies for boilers, TVs, washing machines etc. but few of us have policies in place should we not be working. Life insurance and income protection policies are vitally important for young people and those starting families should think seriously about having protection in place to provide for their children should something happen to them. There is still a myth that protection policies can be really expensive but even a small premium can provide a good level of cover and it is worth bearing in mind that statutory sick pay will only provide £92.05 per week for up to 28 weeks.
Pensions – the first or last piece of the puzzle?
Once you've taken care of everything else, you should look at what you're contributing to your pension. It’s important to remember that you cannot access the funds in your pension until at least age 55 so do not be tempted to put everything you have into the pension and leave yourself short elsewhere. Whilst it is important to contribute to your pension from an early age, you will have time to increase your contributions as your salary increases and your circumstances change.
Contribute what you can to your pension and try to ignore the headlines that state you need to be contributing huge amounts of your salary to be able to retire. If you're contributing what you can afford then you're doing the best you can.
Don’t just rely on the default fund chosen by the pension scheme. Consider doing a risk profiler which will give you an indication of the level of risk you may be feel comfortable taking with your pension and some suggested funds. Your pension is probably the longest investment you will ever make so you can, arguably, afford to take more risk with this investment than with any other aspect of your financial affairs.
Remember to fill out nomination of benefits funds which will indicate who you wish your pension to be paid to should you die. Your pension is generally paid out separately from the rest of your estate so it is important to fill these in even if you have a Will in place. You can access these directly from your pension scheme and it is important to review them as your circumstances change such as getting married, starting a family etc.
- Try to live within your means. It can be difficult but if you have a budget and stick to it then you are half way there.
- Do not compare yourself to others. We're living in a world where everyone shows us the best side of their life and it is really difficult not to want what everyone else has. Nobody has the same circumstances as you and you have no idea what others’ circumstances truly are so you have to stop comparing yourself to them. Do what is right for you.
- Set time aside for ‘Life Admin’. If you don't, it is amazing how far down the ‘to do’ list it can fall. It does not have to take up a lot of time but you do need to stay on top of your finances.
- Keep on top of pension and tax legislation changes.
Remember to treat yourself. If you're keeping to your budget, saving well and making a real difference to your financial future, then it is important to treat yourself as a reward for all the hard work you have put in.This information is obtained from sources considered to be reliable, but its accuracy and completeness is not guaranteed by Anderson Strathern Asset Management Limited. Neither the information nor any opinions expressed constitute financial advice. Investments can fluctuate in price, value and/or income and may return less than the original amount invested. Past performance is not necessarily a guide to future performance. Anderson Strathern Asset Mangement is regulated and authorised by the Financial Conduct Authority.