Originally published on hsbc.co.uk
Why should you start saving early?
Your twenties are a time when there are almost too many goals to save for. You may want to buy your first home, purchase a car, or save up to travel the world in the future.
Whatever your goals, and whether your plans are short term or long term, they all have something in common – a need for money. And there’s really only one person you can rely on to turn your dreams into reality.
While savings and investing may not have been something you have considered before, it is a good way to get on the path to achieving your financial goals. This may sound daunting but putting aside what you can each month could help you grow your financial independence and open up opportunities to you.
If you are young, your greatest asset is time; time for your money to grow, and time for you to grow your own earning potential. You’ll never find anyone in their 50s and 60s saying, I wish I’d saved less; either people regret not saving more* or are very glad they saved as much as they did, as they enjoy financial freedom and the choices this freedom brings.
If you’re in your 20s, retirement seems a very long way off, but between now and then lie a world of choices and opportunities for you. If you get into the savings habit now, you’ll have more options about where you buy a house, what kind of car you’ll drive and what kind of choices you can make along the way. Think of your money in 3 very distinct pots; short term, medium term and long term. Short term is your emergency fund, what you need this month and next, if an unexpected expense arose. Medium term might be your goal to have a nice car before your 28th birthday, but long term is very important, even though it’s harder to visualise. If you’re in your 20s, and consider for a moment your life in retirement, your money will have at least 40 years to accumulate and grow. If you want to maintain a good level of income so you can enjoy life when you stop working, it’s only you who can make it happen. One of the most important steps you can take is to make a start early and keep the saving habit throughout your life. Put yourself in control of your own future.
Young people today who wish to start their saving and investing journey have an unprecedented choice of investment options. Many provides use technology to offer both choices and advice as well as over the phone and more traditional routes. It’s important not to feel daunted by choice; yes, there are many options, but they shouldn’t put you off. If you ask yourself some basic questions, the answers will help guide you to the option which is right for you at this point in time.
Below are some useful tips for you to help on your journey to investing:
1. Start early – it’s never too soon
One of the main benefits of investing earlier is compound interest. If you put some or all your money into a savings account paying interest, and you leave it there, you’ll get interest paid at regular intervals. Leaving it untouched means your interest will then become part of your savings and will earn interest as well. However, with interest rates at an all-time low (as at June 2020 the Bank of England base rate was 0.1%), you might want to consider investing for the long term. One of the best ways to show the power of compounding is to look at how an investment performs over a set period, based on historical figures from the FTSE 100 performance. It’s important to remember that past performance is no guarantee of future returns. Markets can go down as well as up and there’s always a risk you could get back less than you put in. Consider the table below which shows the potential value of an investment over a 40-year period if you invested £200 a month achieving an average 5% growth rate over the longer term*:
|Year||Yearly Investment||Year Interest||Total Deposits||Total Interest||Balance|
*Between 3 January1984 and 1 June 2020 the FTSE 100 generated an annual dividend yield of 5.22% over the 36-year period. Source: London Stock Exchange
In a world that has become increasingly short-term in its view, compound interest is one phenomenon than demonstrates the power of the longer term and its importance to successful investment strategies. Many people are starting to save much later in life, and the consequence is they may have a huge financial shock when they get to retirement age with low levels of saving. If you want to start investing, the earlier you start, the longer your money has to grow and to ride out any short term market volatility. It’s the amount of time you’re invested which makes all the difference.
2. Build a financial plan
While investing early and often can help anyone in their 20s accumulate wealth, that doesn’t mean investing is the answer to every problem. It’s really important to consider all aspects of your financial health. Think of your financial plan as your personal financial trainer. Do you have student loans you’d like to pay off early? Or credit card debt that just keep growing? If you’re spread too thin financially, and especially if you have a habit of overspending, now is the time to learn good habits that will keep you financially fit for a lifetime.
3. Invest in your pension
If you have a full-time job and are a member of a workplace pension scheme, your employer may be contributing to your pension pot. If they do, this cash is a tax efficient addition to your salary and is put away automatically for your future. Some employers will pay more into your pension pot to help you build retirement benefits faster, if you contribute to the scheme too. This is known as ‘contribution matching’. Ask your employer for more details and try and make the most of this benefit. For example, if your employer will make a standard contribution of 6% to your pension, but will also match up to another 5%, if you commit just 5% of your salary voluntarily, your pot will get a total contribution each month of 16% (6% standard + 5% from you + 5% matched by your employer). Even if you start small, at 1% and work your way up, every percentage you add is matched by your employer and will continue to build until you retire. The more you can save the better, but think big by starting early. If you’re self-employed, start a pension scheme early and put as much away as you can. Your accountant will be able to guide you on limits and tax advantages.
4. Automate your savings
No matter where you are in your personal finance journey, one of the best steps you can take is automating your investments so they can take care of themselves. By setting up automatic payments, you can arrange for money to be moved from your account immediately after you get paid (before you get a chance to spend it!). Once you automate your savings, it’s much easier to learn to live on less. It’s also easier to build wealth when you’ve made saving and investing a priority instead of an afterthought. There are Apps which can do this for you, and as you start to see your money grow you’ll find you really start to enjoy seeing what small sacrifices can lead to.
5. Use online tools
To help you understand where your money goes, and where you might be able to cut back on spending to put a bit away each month.
6. Understand your options
There are lots available to you, spend a bit of time researching them so you can make informed choices now and in the future.
7. Use technology
From Apps to help you manage your spending, through to online advice tailored especially for you, technology can become your financial fitness guru, helping you navigate to a more confident financial future.
One reason why equities have performed so well this year is that central banks have favoured keeping interest rates low. According to Hussain, global policymakers are working hard behind the scenes to “keep the show on the road”. He explains, “They’re proactive in offsetting the headwinds from geo-political events. Why? Because they need to keep growth positive to support businesses, households and investors like you.”
It’s never too late to start putting money away, but for you, as a young person, it’s never too early either. Start now on your journey to financial fitness.