We all need to have fun, and fun often involves spending money, but there are a number of steps you can take in your 20's to make sure you are in control of your financial future.
Set a budget
Rather than spending on clothes, holidays or meals out, and then looking at your finances to see if you can afford it (we’ve all been there!) – start by setting a budget. Studies show that satisfaction levels on non-essential spending is far higher when it is planned in advance.
A simple cash flow forecast (money in compared to money out) is easy to set up in excel (or reach out to me for a simple template) – this can then become your budget – once you have added essential expenses and planned savings – you can then see what’s left to spend on the good life!
In doing this exercise for the first time – you may find amounts going out of your account that you can reduce or remove – maybe an unused gym membership or unused app subscription you had forgotten about - every small amount can help.
Take full advantage of your pension tax break/employers pension If you are employed your employer will have an obligation to make pension payments on your behalf. Some companies will offer enhanced pensions eg if you pay 5% the company will pay 7% – any amount the employer offers in excess of the statutory minimum is “free money” and should be snapped up – it’s also invested completely tax free! It's what Martin Lewis would call a 'no brainer'!
If you are self employed or run your own limited company – set up your own pension before you make any other savings - it reduces your company tax bill and is also invested completely tax free!
Reduce or avoid credit card debt!
If you don’t pay off credits cards monthly they have very high interest charges – they can be useful for short term borrowing but should not be used for longer term requirements – search for loans from other sources instead – or consolidate with an interest free period credit card that you pay off over time.
Buy/rent a home you can afford
Buying/renting a home is a huge commitment, and will obviously be a significant portion of your outgoings. The generally accepted rule of thumb is the 28/36 rule – no more than 28% of your income should go on mortgage/rent payments and no more than 36% overall on debt (including mortgage/rent payments). If you live in London this will be a challenge – the point is to make sure you set a limit that leaves you enough to save for the future, because it will arrive one day!
If you have already set up a pension, consider also saving elsewhere – the earlier you start the greater the benefit – this is due to something called ‘compound interest’ -which simply means that interest also earns interest – and it adds up quickly over time!
There are many ways to save – chose one that suits you and your longer term objectives.
Be sure to consider tax free savings options, the best known of which is an ISA. You can grow your money in an ISA and take out the profit tax free in the future. Use the MoneySavingExpert website to research the options.
Buy a car you can afford
It is generally accepted that a brand new car loses 60% of its value in the first 3 years – if you really need a car consider buying a sound used model say 3 or 4 years old – although harder to buy on a lease, loans will be available and cheaper in most cases, and the upkeep costs will be lower than an older car, especially if you choose an eco-friendly model.
Talk to your partner about money!
If you have a partner – be sure to discuss your financial objectives with them. Being on the same page financially can greatly reduce the stress sometimes caused by different attitudes to money.
It’s not always easy to tackle this subject – maybe start by setting your own budget and sharing it with them to see if they also want to take control of their finances….
A secure financial future can greatly improve your sense of well being. If you cannot make all these happen in one go, work towards them over time – and watch your money grow!
Have a yearly check of where you are in terms of your ‘net worth’ – that is your assets (house value, savings, pension pot etc) less you debts (mortgage, credit cards, loans, etc) – watching your net worth grow will demonstrate that you are on the right path to a secure financial future.