As adults, we all wish we had saved and invested more, especially earlier on in life. How much easier retirement would be for most of us had we only paid in an extra few pounds a month into the retirement pot. The wisdom of age is a wonderful thing, but in reality, the young do quite often have more important things to do with the money they earn.
When looking at the early years’ savings strategy, I refer to those young people that have their own income and make their own decisions about how they spend their money.
The pressures on our early years’ income is considerable; saving for a deposit to rent a flat, then the monthly payments to the landlord to keep the tenancy going, the clothes needed for work, the haircuts, the train fares to and from the office, maybe a holiday once in a while, birthday presents and, of course, all that avocado on toast. Then, don’t forget the other side of the balance sheet, the accumulated debt pile. This could be the £50,000 of student debt – which the FT reports as being the average burden – the credit card debt, the bank overdraft and so on. These all must be maintained, at least, if not paid down.
Once all the necessary monthly bills have been paid, often there will be little left in the pot. So how can most young people even begin to consider saving for a rainy day?
These days, so far as saving for retirement is concerned, legislation comes to the rescue for those employed by companies with a workplace pension. However, this does not come without some sacrifice – most plans require a contribution from the employee to be paid regularly, in order to trigger the employer’s portion that goes into a retirement pot. But, importantly, this is where some young people see the saving and investment process starting.
Regrettably, political interference in long-term planning is an issue. The argument that it is too easy for politicians to change the laws to favour a ‘smash and grab’ on pension and savings pots is valid. However, one must not become too risk averse and avoid the potential that is presented by current rules around saving for the long term.
But how about saving for more immediate events in life? To provide a lump sum that may be needed to buy a car, to facilitate a change in career, or even for a deposit for a first home. Helping young people understand how other saving vehicles are structured is difficult because of the variety of products on offer and the language used: ISAs, help to buy ISAs, LISAs, National Savings and Investments, savings bonds, premium bonds, shares and so on.
If you ask the internet for advice, and enter ‘investing early in life’, Google returns 218 million results. This is clearly not helpful. Although a bit of time spent reading around the subject will give a good idea about what’s available and then it is possible to hone the search to find a product that aims to take you to where you need to be.
Of course, the other option is to employ a financial adviser or to turn to someone that may seem to know what they are talking about. But this can cost money, or even worse – if one fails to undertake the due diligence required – have catastrophic consequences.
Mobile phone apps can be a great help too. Attached to some online banks are apps that encourage us all to save regularly. Some savings plans take the spare pennies from a transaction that is not a round figure and invest it into some agreed fund structure.
Other apps will enable goals to be set towards a particular savings target. Some help the investor plan and will often break the whole process down into small daily bite sized pieces. This is a good way to understand quickly that, instead of buying a coffee on the way into work in the morning, have the employer to pay for it and put the money saved into the savings app. The money saved over a period will grow quickly.
Early financial education is key to helping the next generation understand how to save, so more should be done to encourage schools to make it part of the curriculum. It is critical to engender the right attitude early on and to be given the right incentives and advice to plan early on.
An early understanding of, what Albert Einstein said was the eighth wonder of the world – compound interest – and it all becomes a lot clearer. Add to this how compound interest works on debt… and there really is no other lesson to learn!