All this week, Morningstar is supporting Financial Planning Week , the Institute of Financial Planning's national inititative to promote successful financial planning. Day one is focused on the young, free and single. You may not consider yourself to be part of this group but you no doubt know someone who is.
The vast majority of people aged 24 to 34 are not satisfied with their current financial situation, according to the IFP’s Financial Planning Week survey, compiled by YouGov in association with NS&I, and though those in this age bracket are among the most dedicated savers they are the least likely age group to seek out professional help. The survey revealed that just 2% of 24-34 year-olds regularly speak to a financial adviser. The figures appear to suggest that though this group is keen to save, with the majority attempting to do so each month, they may be limiting their options by failing to research ways to achieve financial planning success.
Alan Dick, a certified financial planner with Forty Two Wealth Management LLP, is not surprised that only 2% of young people rely on a financial adviser. “There could be several reasons for this, including the perception of “free” advice as nothing more than sales combined with the fear that genuinely impartial financial planning advice paid for by some form of fee may be too expensive for their means.” Traditional financial advice tends to focus on fixing a perceived problem today, usually with the sale of a product, Dick says, instead of putting in place a strategy to help achieve a defined set of objectives over time. Setting up clear financial goals is paramount, Dick says. “Getting the foundations of your financial planning right from an early stage can really pay dividends in the long run. It is understandable that people in this age group may want to put decisions about the future on hold and concentrate on living for today. However, it is vitally important that a balance is struck between living today and preparing for tomorrow.”
Interestingly, the Financial Planning Week survey also revealed that, in addition to regularly attempting to put aside some savings, those in the 24-34 age bracket currently hold the most confidence in investing in global stock markets compared to other age groups. This implies that with further financial planning and investing information they may be willing to broaden their investment horizons.
“It is easy to see why people starting to save money would focus on cash savings and this may actually be exactly the right thing to do for a significant part of their savings budget,” Dick says. “The first priority should be to build up an immediate access emergency fund to protect against the unexpected. The only way to do this is with cash. Also cash is ideally suited to saving for short term objectives such as a deposit on a future house purchase etc.” But saving cash is only one method of achieving financial goals and for long-term saving other methods can prove more fruitful. “Even at this early stage, it is important to allocate some of the savings budget to the achievement of longer term investment objectives and this will require exposure to some form of riskier assets such as shares,” Dick says.
Indeed, even if stock market returns turn out to be fairly paltry over the next few decades, the benefits of getting an early start on investing can be substantial: The 21-year-old who starts saving £1,000 a year and earns an annualised 5% on his money will have more than £150,000 when he turns 65; were he to wait even five years to begin saving, he'd have only £114,000 when it came time to retire.
Setting aside some money each month—whether in the form of cash or by investing it in equities, funds or ISAs—needn’t be as hard as some might imagine. Many of those included in our Young, Free and Single theme may have recently left full-time education and as such there’s a fair chance that they’re quite adept at living on a budget. The transition from living off a combination of the Bank of Mum & Dad, part-time work and student loans to working full-time and earning a regular pay packet provides the perfect opportunity to get into to habit of saving and investing.
“It is much easier not to get used to having money than it is to cut back later on,” Dick points out, “therefore, where someone has recently finished their student life (budgeting on a shoestring), it would make sense to continue to live within their means and allocate a reasonable portion of their new found income to starting the savings habit as it will prove almost impossible to give up a decent lifestyle once they have become accustomed to it.”
One way to soften the blow of saving for the distant future rather than spending for the now is to invest on ‘auto-pilot’. Investing on a regular schedule is a particularly big challenge for young people, who can find plenty of other ways to spend their hard-earned cash, but taking part in a company pension scheme or other familiar type of auto-invest plan is a great way to achieve painless investing. Because the participant's money is deducted from his or her pay cheque on a pretax basis, contributions are particularly painless for young savers. A number of fund companies also allow you into their funds with a relatively low minimum if you sign on for an automatic investment plan. Morningstar’s Fund Screener can help you find funds that fit your particular investing criteria.
The survey has revealed that only 17% of 24-34 year-olds is saving for retirement but young investors have a big advantage over those who are closer to retirement: time. Investors with a long investment horizon can accommodate greater risk, and thus greater return potential, because there is adequate time to make up losses. And by investing small amounts regularly, the advantages of pound-cost averaging kick in.
Despite being at a point in life where they may be thinking about some rather large purchases (the survey shows that the most popular reasons for saving amongst 24-34 year-olds is either to buy a property or for a holiday this year), young people can often be burdened with scarily-high levels of debt, particularly if they have recently graduated from university.
“Where debt has accumulated it is important to get this under control and develop a strategy for repaying this as soon as possible,” Dick warns, suggesting that addressing the most expensive debts first is the best way to start. Young people in full-time employment tend to suddenly find themselves bombarded with bank offers of loans and credit cards but it is important to try to resist such temptations. Yes, a credit card can come in handy and it also allows you to build up a credit history, but careless use, misuse or overreliance on such payment methods can land you in a sticky situation.
The habits that you pick up now will likely last your entire life time, and if you develop bad habits at an early stage these are going to prove difficult to break at a later date. Key to successful financial planning is budgeting, regular saving, reducing debt and setting-out long-term goals.
For more investing tips for young people and new graduates, click here.
The IFP’s Financial Planning Week survey was compiled by YouGov in association with NS&I. All survey figures, unless otherwise stated, are from YouGov. Total sample size was 1,896 adults. Fieldwork was undertaken between 29 June-2 July 2009. The survey was carried out online. The figures are unweighted. Regional breakdowns and variations are available upon request.
