With age comes wisdom, but so do the bills.
The older you get the more responsibilities you take on – and the expenses come rolling in. Despite these costs draining bank accounts every month, there are numerous steps that can be taken to improve your financial position over time. Teaching young people how to structure their finances and invest any surplus income is one step closer to financial security. So, let’s explore the different stages of early life and the steps that can be taken to maximise your own or your children’s wealth over time.
The turbulent twenties
In my experience, the “turbulent twenties” is a time of education and career building – when your income, hopefully, starts to increase. However, expenses also tend to rise and spending on discretionary items and life experiences – all too often fuelled by expectations generated by social media – can get out of hand. This can, unfortunately, lead to the accumulation of debt.
For a person in their twenties to manage this turbulent decade, it's important that they think about and define their priorities. Then steps can be taken to make these goals a reality.
Whatever these goals are, they are likely to hinge upon financial discipline. Once the bills are paid, the important step should be setting aside a monthly saving amount. Sticking to your, and not dipping into savings, regardless of how much that pair of new shoes or holiday seems important, will provide the foundation needed to bolster your personal finances in the coming years and decades. By implementing a financial plan, you can start making your money work for you rather than living from one payday to the next one.
As thirty-somethings see their income increase it is often the time that bigger decisions, such as buying a home, marriage and building a family, start to be made. Student loans are currently charged at an interest rate in excess of 5% - which is higher than current borrowing rates – and may still be a major financial issue. This is where older generations can really make a difference to those they love.
An interest-free loan from parents or grandparents can make a major difference to a graduate’s finances. By eliminating these high-interest-rate repayments, original loan repayments can be redirected to the family member on an interest-free basis. This avoids the significant cost of compounded interest – reducing the length of the repayments and clearing the debt early.
Alternatively, a part of the budgeting exercise mentioned earlier could involve redirecting monthly savings into your student loan, therefore reducing the loan amount at a faster pace.
As surplus funds build during the decade it’s important to use annual Individual Savings Allowance (ISA) allowances, current at £20,000 for an individual. This is a good way to build a mortgage deposit, as no capital gains tax will be payable on surrender of the funds.
Alternatively, you could use a Help to Buy Equity Loan, where the government lends homebuyers up to 20% (40% in London) of the cost of a newly built home. The equity loan is interest-free for the first five years. The minimum required deposit is 5%.
Another way of getting onto the property ladder is Shared Ownership.
Shared Ownership is an affordable homeownership scheme that makes it easier for first-time buyers to get on the property ladder. Buyers purchase a share of a property and pay rent on the remaining share. You are able to purchase further equity and reduce the rent you pay at a later date as your financial circumstances change.
You can also make pension contributions into your company pension scheme. The benefits of which include:
- Tax relief on your pension contributions at your highest rate of tax
- Compound interest within the pension fund
- Employer contributions into the pension scheme, which could be matched or be higher than your contributions.
The most important thing is to start teaching young people the value of managing their finances. The earlier they realise that disciplined spending habits and realistic budgeting can add a turbo-charge to their wealth.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.