Each stage of life presents different demands on your finances – housing, family, planning for the future, debt payments. The pressure of each one will fluctuate depending on your income situation and your immediate concerns.
Taking a step back and looking at the long term can be a worthwhile exercise and give you clarity on how best to prioritise. In your 20s, you are likely to experience several milestones such as graduation and starting out in your career. You may not have family commitments, but you will have decisions to make about your finances. Make the right choices now and it will help put you in a secure financial position throughout your life.
Here are some of the areas you may want to consider in your twenties:
House deposit & mortgages
One of the biggest financial issues 20 to 30 year olds have is building a house deposit to get on the property ladder. We have always been told that getting on the property ladder is important and is usually the goal most people set when they first start working. However, as a generation of renters, it is becoming increasingly difficult to establish a deposit. For the lucky ones, deposits can come from parents and in theory repaid or parents gift the deposit. There are also Government initiatives to help young savers such as Help to Buy and mortgage products such as the Family Springboard Mortgage that can help get you on the ladder. Talk to an independent mortgage adviser for more information on these.
Another important tool for those wanting to save for a deposit is the Lifetime ISA.
The Lifetime ISA (LISA)
The LISA is designed for two purposes, for first time buyers or to save for retirement. I would argue it has greater relevance for the former.
If you are under 40 you can contribute £4,000 per year to a LISA and receive an additional 25% from the government (£1,000). If you are consciously setting aside money to purchase your first home, it makes perfect sense to take advantage of the government’s 25% additional contribution and put this money into a LISA. This 25% is in addition to any interest or growth.
Once on the property market a large portion of monthly income is eaten up by mortgage payments with many people looking to pay off as much as they can as soon as possible. While it is important to repay debt as soon as you can, there needs to be a balance between monthly repayments and having money available for other financial considerations.
Student loans – to repay or not…
There is also the debate about paying off student loans quickly or not. Tuition fees have increased in recent years and interest rates are creeping up, so there is an argument to suggest we should be doing more to pay this debt off. However, there are a couple of things to note.
The earnings threshold for repaying your loan is £25,000 (if you started university after September 2012) and the debt is wiped out after 30 years from graduation regardless of how much, if any, has been repaid.
Once you earn above the threshold of £25,000, you pay 9% on everything you earn above this amount. For example, if you earn £31,000, you will repay £900 (9% of £10,000). The threshold is due to increase to £25,000 from April 2018.
Those who started university before September 2012 are on Repayment Plan 1 which has an interest rate of 1.25%. Graduates who began university after September 2012, are part of Repayment Plan 2, where the interest payable is RPI plus 3%. Over the last 5 years, this is an average interest rate of 5.5%, significantly higher than the historic lows of 0.25% set by the Bank of England and the interest rate of 1.25% for those on Repayment Plan 1. At these rates, student debt is more likely to be a cause of concern for those affected.
While the government aims to crack down on readily available credit, it is still relatively easy to acquire interest free credit over a couple of years. Most people enter into these agreements with the view that they will easily pay them off within the interest free period. However with other outgoings, this can slip down the priority list and when the interest becomes payable, repayments can easily become a financial burden.
It’s tempting to buy items on credit, but it is worth taking some time over the decision. If you still want the item in six months’ time, you may have been able to save the money in that period or alternatively it may highlight you cannot afford it now. Adding debt unnecessarily is not a good idea both in the short or long term.
Debt has become a significant factor in the finances of 20 to 30-year olds and the question is, what can be done about it?
The first most important step you can take is to plan as soon as possible and by plan, I mean take ownership of your finances.
It can be as simple as knowing what your monthly income is, what your fixed monthly outgoings are and how much is left to spend/save. This will allow you track more closely what you are spending money on, whether you can afford to save and where you can make changes to achieve small goals over time.
The hardest thing to do when you first start earning money is save it. There are too many things we want to buy and too many places we want to go. If you can establish a plan each year and make small changes over time the benefits will begin to creep up on you and your future self will thank you.
Saving for retirement
Most 20-year olds don’t think about retirement, after all it’s over 30 years away. In fact, unless you are involved in financial services it’s probably the last thing on your mind. Even when I first started work I contributed the minimum I had to into my pension but gave it no real thought.
With your first ‘proper’ job, it’s likely you will have more money than you’ve ever had. A good way to approach saving at this point is to realise that you can’t miss what you never had. By this I mean, if you earn £25,000 per annum and you start immediately contributing an additional 1% to your pension on top of any non-compulsory/compulsory contributions, you will not miss this proportion of your salary because you never received it to begin with.
An additional 1% pension contribution on a £25,000 per annum salary is £250 per year (£20.83 a month).
Taking that 1% as salary instead of paying it into your pension would incur income tax and National Insurance deductions resulting in a net payment of £14.66 into your salary. Therefore, by contributing an extra 1% of your salary to your pension, it has cost you £14.66 per month but you will receive £20.83 in your pension, a return of 42%!
If you took this approach every time you received a pay rise, by the time you were 30 to 35 you would be contributing significantly to your pension without realising it and your retirement planning would be some way ahead of the curve.
If you have recently started on your chosen career path and want to start taking control of your financial planning, or need advice on any of the issues covered, please get in touch.