Life in your 20s can be exciting. Many finish university, get their first ‘serious’ job, and start to live independently. Lots is going on from putting down a solid career foundation to managing a hectic social life – there’s little time to think of much else. But this is precisely the time to start considering investment.
While many may be tempted to fritter away their cash on holidays and clothes, it’s a smart idea to start investing and preparing for a more financially secure future. And it doesn’t need to take up lots of time and thought! Here are our top tips for under 30s looking to take their first steps into investment.
Money Management
No one wants to bite off more than they can chew. Good money management is key. It’s fundamental to be on top of your finances so that you know how much you can afford to invest –. There are a few simple things you can do to get your financial situation in a healthy state.
Perhaps the most important is to clear any debts you owe. While student debt may be tolerable, it’s best to clear other debts as soon as you can – the longer you leave debts unpaid, the more the interest builds up. The same goes for credit cards – with the average credit card balance in the UK estimated to take 25 years to pay off, it’s wise to pay off debts as soon as possible to avoid the slow drip of minimum payments.
Sensible spending habits are equally important. It’s easy to get carried away after landing your first job – with a hefty amount of salary in your account every month, it’s tempting to squander it all very fast. After forking out for rent and numerous nights out (with the estimated cost now standing at £70.56), your hard-earned money is soon depleted. Keep a close eye on your spending habits and hold back from unnecessary purchases. There are even a number of apps available which can help you keep track of your finances.
Start Early
If your financial situation is sound, start investing right away. The reason for starting early is compound interest – something Einstein once called the ‘eighth wonder of the world’, and Warren Buffett labelled as one of the main reasons for his enormous wealth.
In simple terms, compound interest is interest earned on interest that has already been accrued. It’s power can be summarised by one example: if you start saving at 21 and stop at 30, you’ll have a bigger pension pot than if you were to start saving at 30 all the way until you retire at 70. The earlier you begin to invest, the more you’ll gain from compound interest.
Increase Pension Contributions
Pensions probably aren’t at the top of the priorities list for most 20-somethings, but they should be. With the UK under threat from a looming pension crisis, it’s more important than ever for young people to start considering how they will provide for themselves once they finish work – even if they’ve only just started!
Employees are now auto-enrolled on a pension scheme by their employer. Both employer and employee contribute to a pension pot – from 6 April 2019 the minimum amount that an employer can contribute is 3% of the employee’s salary. If the employer only contributes 3%, then the employee must contribute 5% themselves, as total contributions must come to 8% of your salary.
As a general rule, look to contribute as much as possible, as early as you can, to your pension pot. Some employers will match your increased contributions up to a limit, and you’ll benefit from tax relief. As a basic rate tax payer, for example, you’ll receive relief at 20% – this means that if you contribute £80 to your pension pot, you won’t be taxed on the first £100 you earn.
Pensions can seem complicated at times, but it’s important to remember even when you’ve just started your working life. For more detail on how pensions work, and how to choose the right one for you, take a look at our previous post.
Start With an Index Fund
If you’d like to get your hands on any potential returns earlier than you would with a pension, then Index Funds are a good place to start. This type of fund tracks a particular market and passively matches its performance and fund managers aren’t involved. In the UK, the best known indices are the FTSE 100, FTSE Mid 250 Index, and the FTSE AIM All-Share Index. Rather than choosing an individual stock to invest in, you reduce risk by investing across all the companies included within an Index. As these funds aren’t actively managed, they have relatively low costs, but it’s also worth noting that returns are also fairly low.
As a twenty-something, investing probably hasn’t been one of your top priorities. By taking some time to consider how to invest however, you can start to prepare for a more financially-sound future. With our tips on how best to invest for under 30’s, you’ll be better informed on how you can utilise your money.