Full disclosure: I am not a child of the ‘00s’.
For me, the ‘00s’ were represented by university, starting as a fresh-faced graduate at Mattioli Woods, and buying my first house (incidentally just prior to the financial crisis of 2008 and learning, to my horror, that house prices can in fact go down, and thanks to my 95% mortgage, to the realms of negative equity….).
So in writing this piece I share a few insights that I now impart on my younger sister, who, rather than the eight year old drawing pictures to post (how quaint!) to her older sister at university, now finds herself at an age when the requirement for financial resources far outstrips supply!
And herein lie the difficulties.
For many, our twenties are quite a liberating time. As careers get established, greater seniority leads to higher renumeration and the opportunity to live a lifestyle we might only have lusted over as a cash-strapped student.
But then at some point a transition happens. We move from care-free consumerism to responsible ‘adulting’ and find ourselves lurching from one financial behemoth to the next including house deposits, weddings or starting a family. Such milestones require the concerted effort that only a tight budget and blinkered prioritisation can achieve, right?
And yet, while we are regularly reminded through the streams of our social media pages, to ‘be more present’ this focus on the today leads to missed opportunities that might ease the financial burden of tomorrow.
So what top tips might I give to help lay strong financial foundations that your future self will thank you for?
Firstly, as tempting as it is to buy that designer handbag, a new outfit every week or plan your next holiday overseas, it is easy to let ‘lifestyle creep’ lull you into a false sense of what is affordable. This makes saving that little bit harder when you have to start reducing your discretionary spending to afford your first home, or dream wedding or perhaps welcome a little person to the world. So next time you get a promotion, take a moment to consider further ahead.
Do you have an emergency fund? Three to six months essential outgoings in the event of something unexpected arising (world pandemic anyone?) This will provide you with some breathing space and financial resilience.
If you are saving for your first home, is your money working as hard as it can? Depending on your timeframe you may wish to consider investing rather than simply holding cash, while a lifetime individual savings account (LISA) provides a 25% uplift from the Government up to a cap of £4,000 per tax year which could help you save that all important house deposit.
But as you set out on that path to hallowed home ownership take a moment to consider the financial commitment you are making and all that rests on your ability to work. Bricks and mortar, insured? Check. Prized possessions? Check? Favoured canine companion (I am thinking lock down puppy!) Of course. Do you not know how much a visit to the vet costs? You?
Never underestimate the need to insure your most valuable asset, yes yourself. Without it, your ability to secure your financial position is compromised in the face of illness, redundancy and, in the worst-case scenario, death and the impact this could have on any loved ones you may leave behind.
So far so good. All sensible steps to help with those short-to-medium term goals, so here is the challenge - retirement. Yes I am going there! Now I know you think you have that covered. With the introduction of auto-enrolment from 2012 I would hazard a guess that by now you have already accumulated several pension policies. And as encouraging as this is, I would hate to think the presence of a workplace pension arrangement would lull you into a false sense that all is taken care of. It really is not.
Auto-enrolment helps to raise awareness and establishes good habits, but for many, will not result in the retirement lifestyle they aspire to. My advice? Think about your pension as a mortgage in reverse. The debt required to purchase a house is so substantial we break it down over 25-to-30 years. Likewise, the capital you require to support yourself over what will hopefully be a 25-to-30-year retirement requires the same financial commitment both in terms of timeframe and resources.
The most valuable piece of advice that I have given my sister? Start early. Start strong. At the risk of sounding like a kill-joy, divert some of that pay rise to increasing your pension contribution, you will not miss it if you did not have it and the earlier and more aggressively you can fund your pension, the cheaper your retirement will cost you.