Unfortunately, financial planning is still not a compulsory part of education in schools. This means that a lot of us, myself included, have had to face some big financial decisions completely unprepared.
What does my salary mean in “real money”? What should I be doing with my surplus income? Should I opt-out of my pension scheme to help save for a house? Can I even afford a house?
At 22, I got help to answer those important questions – I chose a career in Financial Planning and I was encouraged to build my own financial plan. Now, for the first time, I have a real idea of what my future could look like and how the decisions I make now may affect this – for better or worse!
Here are a few things I have learnt along the way, which I think every twenty-something should know:
1) Money Problems Do Not Disappear
According to a 2015 poll, less than half of twenty-somethings are saving for retirement. In many ways, this is understandable – many of us have debts to pay off, bills to cover, and basic necessities to buy.
A lot of people put off saving in the belief that they will have more disposable income in future. Unfortunately, many bills increase as we get older – we may get married, need a bigger place to live, buy a new car, or a fancier phone, and with many of those things come more unexpected costs!
Finding a way to save £10, £50 or £100 a month now sets you up for a habit to save more in future.
2) Financial Planning Will Help Your Relationships
Money is an ever-changing problem, meaning that conflicts can often remain unresolved. Couples who argue about finances weekly are twice as likely to divorce than couples who argue once a month.
Financial Planning involves looking at objective numbers and figures, but couples tend to use more negative emotional behaviors when discussing money. It is difficult to look at money without proper tools and a framework, but focusing on facts rather than feelings will be much more constructive.
3) Financial Planning Prepares You For The Unexpected
If you were to die tomorrow, what financial obligations would you leave behind? If you are single now, how is the impact likely to change if you get married or have children in future?
While you’re still young and healthy, it is unlikely that you’ll die within the next 10 years. Insurers know this too, so it makes sense to start life insurance before your natural health begins to decline.
My own life insurance policy will continue with the 25-year-old me rate for the entire term. If I had waited until 35, the cost would be much higher, because my likelihood of death will increase with both age and poor health indicators. The best time to prepare for the unexpected is right now.
4) A Penny Saved Is Worth Much More Than A Penny Earned.
“Compound interest” is where interest is earned on interest, with the impact being that the earlier you save, the more these savings will be worth – often significantly so.
Working in Financial Services, I knew of compound interest, but until I started playing with the figures, I had no idea what impact it could have on my personal future.
I am currently 25. If I saved £200 per month for only 10 years, I would have savings of over £100,000 by age 60 (assuming annual growth of 5%). By contrast, if I waited until I was 35, I would need to save for 20 YEARS – that’s twice as long, with twice as much layout on my part – to catch up by age 60.
Guess who upped their personal pension contributions as soon as they worked that one out?
5) Financial Planning Is For Everyone
It is a common misconception that true Financial Planning is only for the rich or the retired.
Young people who have undertaken an element of planning will often go direct to product providers or insurance brokers with the solution they think they need. Unfortunately, few commission-based providers will advise you of the suitability of your plan, and none can be expected to really know without undertaking a true financial planning exercise for you to see the whole picture.
Taking a cold, hard look at how you save and spend your cold, hard cash is eye-opening. But financial planning is one of the best decisions I’ve made in my twenties. With much more of my life left to live, I feel confident and secure about my future, financial and otherwise.