“A goal without a plan is just a wish.”
So said Antoine Saint-Exupery in a simple yet profound statement of truth.
I’m often asked by 20 somethings (and their parents/grandparents, as well as financial bods and interviewers) what a young person’s financial goals should look like today.
But that’s the wrong question. We shouldn’t be TELLING young people what to do with their money in the long-term. That’s where the financial industry and traditional media has gone wrong, time and again.
Young people do not take kindly to lectures, doom mongering or unnecessary paternalism. So-called “millennials” may have missed out on formal financial education but we are not actually that dim when it comes to our money. We instinctively understand that money is a complex subject, that we are subject to commercial interests far larger than ourselves and that you have to walk a mile in another person’s shoes to understand what they go through (particularly if they are 3 inch heels).
Just looking at this picture is giving me a bunion
We also mostly understand that whatever we do with their money, we close off options. Money is a finite resource for most people and even debt comes at a high cost for the luxury of opening doors today.
So if someone decides to live for today rather than save for tomorrow, it is a choice (and a legitimate one if their main goal is to “enjoy life as it comes”). Who are we to say that is an inferior goal to any other?
It’s ultimately up to individuals to decide what’s best for them. What makes sense for one person will be madness for another.
But young people can’t necessarily decide what’s best if they don’t have all the information at their disposal. If 20 somethings aren’t educated about what’s possible and what isn’t, they aren’t getting the whole picture.
And so they end up – unwittingly – cutting off their options, limiting their horizons. They’ll never know if there was another way. Not a “better” way, necessarily, but one that could have made them happier.
That’s why I believe in understanding all your options, and keeping them as many of them open as possible. That, in my mind, represents true FREEDOM!
George Michael was on the money
You’ll never know unless you take the time to assess your situation and see if changes can be made – however small.
So with that in mind, I have put together a quick and dirty financial starter kit for anyone in their 20s – these tried-and-tested tips will help you on your way (or be an invaluable resource for someone you love).
Clear the decks
It’s hard to think about the future when you’re weighed down with debts, zombie direct debits and a bank that leaves you feeling meh. You could switch to a 0 per cent balance transfer card, and set aside the right amount of money each month before the interest free window ends. Stop any memberships and regular payments that are draining your income for no great benefit. Look at your relationship with your bank. Is it time to break up? The 7 day switching guarantee means you can move quickly to a new bank that will treat you better. Research your options online. Current accounts that pay interest are a lil’ boost for those who stay in the black every month but if you’re prone to occasional overdraft excursions, find a bank that will give you the best possible terms for authorised overdrafts.
Look at the easy kills
You’re almost certainly paying more money than you need to on basics like energy, mobile contracts and transport costs. Set aside a time to switch bills/tariffs online (it’s easy) and research ways to make savings on regular train or car journeys. These will reduce the need for you to make “hard sacrifices” in your spending.
Look at budgeting as self care
We wouldn’t dream of working so hard that we collapse in the office, or skipping that run/gym session/meditation class for months at a time. It’s no different for our finances – we need to look after what’s coming in, and ensure we don’t get to the end of the month and wonder where it’s all gone. Audit your main areas of expenditure. Most people have a couple of key weak spots (mine are beauty products and food). Set a spending limit, and if need be, get a pre-paid card or download a budgeting app to give you a clear idea of what you’re spending each day so you can become more mindful.
Take the 90% challenge
Most people freak out if they’re asked to set aside 10% of their salary. It helps to mentally “flip” this. Could you live on 90% of your income? The answer for most people is “yes”, even before they make pain-free cuts or start spending more mindfully.
Build up a “what if…” pot
Accidents happen. In the space of two months recently, my hoover, steam iron, kettle AND toaster all broke! Okay, maybe these aren’t strictly “emergency” items. But what if your boiler broke down? What if your washing machine went kaput? What if, what if…replacing real lifesavers quickly without getting sucked into debt can be tricky, unless you have emergency savings. If you haven’t already got an instant access pot together, start now. Only draw from it in emergencies and replace whatever you take out.
It helps to have goals, but it’s not essential
People put off saving and investing because they’re not sure what their future holds. It helps to have clear future plans, e.g. getting on the housing ladder or starting a family, if you’re putting money into markets. And planning ahead is crucial as you’ll need to be invested for at least five years to ride out the waves of the stock market. But it’s not essential to have a defined objective. So long as you’re happy to stay invested for the long-term, you can drip feed that money into markets or stay invested in a workplace pension, and know it’s working harder for you than in a savings account, and get on with the rest of your life. When your goals start to crystallise, you’ll be very glad you kept your options open.
Stay above the fray
A watched kettle never boils. Constantly fretting about your savings, investments or pension is not helpful. Headlines about plunging markets can be very unsettling, but most young investors need to keep calm, stay invested for the long-term and diversify their portfolio. Market timings only really matter when you come to withdraw your money, but in the beginning, don’t let them put you off the whole notion of investing.
Be realistic, not idealistic
There are never any guarantees with investing, and pensions don’t offer the same guarantees as years gone by. Your money can go up as well as down and there is always a chance that you might not get back what you put in. Data shows that the stock market tends to outperform savings in almost all conditions, although again the future will necessarily pan out as expected. But so long as you understand this risk, you can accept the uncertainties of the stock market in the hope that being a bit braver will pay bigger rewards. Don’t compare yourself to other investors, or keep wondering about all the different ways you could be making more money. Chances are that some of them are too good to be true and many won’t be suitable for your circumstances. You have to bite on the bullet, make the decision to start somewhere and “own” the outcome, whatever it might be. This will stop you procrastinating so you never invest in the first place!