Financial Planning in Your Early Years

So, Nick, let's talk about early years. What kind of life stage is this?

Nick Cann: We’re led to believe that all young people now are all coming out of university or such withmasses of debt, and very difficult to get on to the housing ladder, through to mortgages. And the market for young people has changed significantly over the last few years or last five to 10 years really. And also people's career expectations, I think, have changed. By understanding and looking at what younger people want, they’re not necessarily going into long-term careers or expecting long-term careers.

Petroff: Okay.

Cann: So, for us it's therefore really important that they are trying to set out some sort of plan to work out what they would like to achieve. What's really important to them? The government and the regulator will suggest that they should be paying off all their debt. And I think it's difficult to disagree with that. However, human behavior isn't like that. People do want to try and save for the long-term in terms of investing and some goals and things they’d like to do in the future. They’d like to perhaps save a deposit for house. They’d like to start even protecting things which are important or close to them. So, having that plan, having an understanding particularly for younger people of what their budget looks like, what their incomes and outgoings and their available cash flow, if that's appropriate, and as they start to build up a balance sheet, keeping it under review, so they can make the most of their opportunities when they can influence things that they are doing themselves.

Petroff: So, in early years then look at where the money is coming in, where the money is going out as a starting point. And then see, if you have debt, how you should be paying that down. And how would you suggest saving for the future and asset allocation?

Cann: Yeah. I think that's important. I think, as I said, most importantly, it’s really an income and expenditure… being ruthless as to income is fairly known, expenditure less so, and it’s sort of what subscriptions can we start taking out, and what beer can we take out. Well, all the nice things that we do. We don't want to kill ourselves and by taking out all of the treats, but being quite ruthless as to our budget, and then if there is some availability to save, putting it into monthly savings ISAs is just brilliant. At the Morningstar conference, for example, one of the speakers talking around young people putting a high percentage of their investment to this stage into emerging markets in the hope that they don't need the money for a long time. But over a period of time, those market should return some really healthy growth for those individuals. So, it's maximizing at a time when it's perhaps not quite so important … the potential to earn some good returns.

Petroff: So, knowing in your mind, in those early years, that: ‘I'm going to take some money. I'm going to put it to the side. And yes, it might be volatile, but I'm hoping that this area for investing is going to be high growth in the long run.’

Cann: Yeah. It's the discipline of saving I think. I remember, as a–well, it's difficult to remember that far back--but when I was a young person, if I had money in my pocket, I would spend it. So if I was able to put it away into a monthly savings plan, at those times, we had 10-year saving plans, and so it was a way and it was towards some future objective or some - hopefully some cash I’d have to do something sensible with, but I wasn't missing it out of my monthly income and expenditure.

Therefore, I would urge anybody young, considering their desire to save, is putting it away, forgetting about it in many cases. So in the future, they are going to have something that they are going to be able to use effectively to, whether you’re buying property, whether it's achieving other things, other luxuries or holidays or so on, that they might want to enjoy in the future.

Petroff: Now, one last question for you: at this early stage, would you say ISAs or pensions?

Cann: A personal response: I think, pensions for young people are totally unengaging, totally uninspiring. Legislation is changing, very restricting. It’s money that’s being put away, that they are not going to be able to touch till they—imagine being 60 or 65.

Whereas ISAs perhaps at this stage offer the flexibility, they can move things around. And also they have got the ability to perhaps use some of that capital that they’re able to grow over the term as they’re coming through life stages, when they perhaps are looking at children, and getting married, perhaps they’d reverse the order of that, who knows these days, and buying other properties and other things. So, I think it is a difficult decision because there is still tax incentives for saving for pensions, but ISAs certainly offer young people a lot more flexibility on how they can use their money.

Petroff: Okay. Thanks very much. That was Nick Cann from the Institute of Financial Planning.