Today sees Finlay Alcorn of Young Money Matters write a guest post for Mrs Mummypenny. Aimed at the more younger readers, please share with people you know. Over to Finlay.
According to the Office for National Statistics, 53 per cent of 22- to 29-year-olds had no money saved in a savings account or an Individual Savings Account (ISA) in 2014 to 2016. This is up from 41 per cent in 2008 to 2010. The increasing number of young people without savings is worrying; whether it’s for an emergency, or for the long-term, it is important to begin saving your money as soon as you start work.
Emergency savings pot
One of the first things you should do is build up an emergency savings pot. It is inevitable that you will experience a few large, unforeseen costs over the years. Whether it be a broken-down car, or a boiler that no longer works, being prepared for these costs will ensure you are much more financially secure. Another possibility is that you lose your job. Mrs Mummypenny says that saving approximately 3 months worth of your salary is a good target. This will give you some time to find a new job and start earning again, as well as cover most unexpected costs that come your way. Here are some more tips for handling unforeseen costs and financial emergencies.
In addition to being more financially secure, saving as soon as you start work will help you practice discipline and build up the right financial habits. If you work for a few years without saving, you will become used to spending all of your disposable income. When you do start saving, it will be more difficult as you will have to cut costs and adjust your spending habits to be able to put some money aside. If, however you start from day one, your spending habits will already take into account the fact that you save money.
Saving for your first home
Why not consider the Help To Buy ISA scheme where the government will pay you a 25% bonus on top of your saving? It can only be used for a first-time house purchase.
You can start the savings with a £1200 lump sum and then on going the maximum you can save is £200 a month. The maximum bonus is £3000 meaning that you can save up to £12,000 to then receive the bonus from the government.
There are drawbacks, mainly that it is slow to build up the balance. If you are aiming for a saving of £12k it’s going to take you 4 ½ years to save up the money. You must have a balance of at least £1600 to qualify for the 25% bonus. Your solicitor will need to apply for the saving and it can only be used for the deposit of your house purchase, not stamp duty or fees. The house being bought must be less than £250k or £450k in London.
Another important thing to consider is saving for retirement. With the UK retirement age being pushed back further and further, it may seem a long way away, but preparing from an early age might be one of the best financial decisions you make.
One of the most common ways of saving for retirement is through a pension. Other options include saving into an ISA, or investing in property. Whatever you choose, saving as soon as you start work can bring many benefits.
One of the key benefits of a pension or ISA, where your money is invested, is that your investments experience compound growth. When your investments generate returns, these are reinvested. The following year, you generate returns on your original investment, as well as on the returns for the first year. This process repeats over many years, and the value of your savings increases exponentially. The longer you have money invested, the bigger the effect compound growth will have on your savings.
According to the FT Adviser, if you had invested £5,000 into the FTSE All Share in 1986, and withdrawn any returns, then the value of your investments would have grown to £28,357 by the end of 2016. With compound growth, however, where the returns are reinvested, the value of your investments would have grown to £88,396 over the same time period.
If you are saving into a workplace pension, your employer will also contribute some money. The exact amount that they give you varies between employer, however most simply match your contributions. This means that if you save 5 per cent of your salary into a pension for example, your employer will also add the same amount. Technically, by saving into a workplace pension you are receiving a 5 per cent pay rise, which you will benefit from during retirement (along with all its compound growth between now and then).
If you do not save into a workplace pension, you are missing out on free money from your employer. This can amount to tens or even hundreds of thousands of pounds by the time you retire. Start as early as possible to maximise the benefits you receive.
These are just two reasons why you should start saving for retirement as soon as you start work. Here are six more reasons why you should save into a pension.
To conclude, saving as soon as you start work will not only help you be more financially secure both in the short-term and long-term, but it will also help you build up the right financial habits. In addition, the earlier you start, the less you have to save to reach your financial goals. For more information about pensions, savings and investments, Mrs Mummypenny has written some great posts covering these topics, or feel free to visit Young Money Matters and take part in our quizzes!