Why time is money for millennials
On the lower rungs of your career ladder and still saddled with student debt, seeking financial advice may be way down your list of priorities. But getting yourself financially on track now could save you a huge amount of money later on – because being young has clear advantages.
May 9, 2017
From some angles, financial advice looks a bit chicken-and-egg. You seek advice because you want to have more money, but until you have more money there doesn’t seem to be much point in seeking advice. The popular image of independent financial advisers (IFAs) is that they help wealthy people to get wealthier. So if you’re just starting out in your career, why bother?
There’s no present like the time
When you’re young, you may not have much income. But what you do have is a longer life ahead of you. And when it comes to financial planning, time really is of the essence.
This is because of the way compound interest builds up money over time. The best demonstration comes from pension savings. If Darren starts a pension at 20 and pays in £50 a month, while Ed starts one at 40 paying in £100 a month, then Darren will end up with around twice as big a pension as Ed – even though the two have paid in the same total amounts.
The magic of compound interest works for any kind of saving or investing – such as saving up a deposit for your first home. There are useful vehicles available for this (such as the Lifetime ISA and the Help-to-Buy ISA), so the earlier you can start using these, the more value they will deliver. A financial adviser can help you identify your mid-term goals and plan a savings strategy to meet them.
The earlier you start using ISAs or other savings vehicles, the more value they will deliver
Cash savings or investments?
Advice can also be crucial in choosing how to save. People think of cash savings as more secure, but if inflation exceeds interest rates (as they do now) then cash will actually lose value over time – wiping out the benefit of compound interest. Therefore, for any goal that may be several years in the future, you should consider taking on more investment risk.
Stocks and shares stand a good chance of beating cash savings over periods of five to 10 years or more. However, they can also suffer sharp dips in value, which is why advice is so important. An adviser can help you find the right level of risk for your goals, and also advise you on when to transfer into cash so that your gains are safe for when you need them.
Don’t neglect your pension
Retirement may seem too far away to think about – after all, it’s hard enough to save for a home and family. But now is the time for joined-up thinking. Remember that you may be even more squeezed later in life, with a mortgage to pay off and perhaps children too (raising one child can cost the equivalent of a small house).
So save as much as you can into your pension now, to maximise the effect of compound interest over the years. The time may come when your biggest extravagance is a two-year-old’s birthday party – if so, you’ll be glad you put in the groundwork early. A financial adviser can advise you on contribution levels, and also help you choose the right investment fund (the default fund is rarely the best-suited in the early years).
Emergency Funds and more
It’s very prudent to save an emergency fund in case your income is interrupted. However, it’s very hard to save more than a few months’ worth of earnings. If the reason you can’t work is illness or injury, you may need a more long-term solution.
A financial adviser can recommend suitable forms of insurance, such as income protection or critical illness cover. These really come into their own if you have a mortgage to pay, and are far more useful and versatile than PPI. You might never need it, but if you do, then this kind of protection can end up being worth many times what you pay into it, and can literally save you from poverty.
Getting financial advice is a chance to talk through your plans and create a long-term spending and savings strategy
What to watch for when seeking independent advice
Make sure you consult a genuine IFA, not just the person at the bank who is referred to as an ‘adviser’. A bank’s employee will only recommend that bank’s own products, and will not perform a detailed fact-find on your circumstances as an IFA does. Consequently they are of limited use, and may even be counter-productive, by giving you a false sense that you have taken advice.
Real financial advice is less about financial products than about you and your goals. It’s a chance to talk through your plans and create a long-term spending and savings strategy. Good financial advisers encourage you to think about a range of alternative futures to help you choose the one that works best and feels right.
You can find an Independent Financial Adviser to meet your specific needs by using our free finder tool, powered by Unbiased.