My plan to become a financially independent 'grown-up', by 19 year-old me
Being grown up is a nebulous concept. You can be a functioning adult at age 18 but in many ways not feel, or even be, ‘grown up’ at all.
I have it on good authority that this feeling can last for many more years.
But I took an important step towards grown-upness when I received my first paycheck a few months ago. The feeling of joy at seeing the money I had earned was soon replaced with the fear that I am now undeniably an adult – one who has to pay taxes and must be responsible with their money (thrilling isn’t it).
But where to start? Like most teenagers, I used to find the jargon around personal finance pretty impenetrable. People of all ages do.
But I chose to take a gap year after doing my A-Levels, to give me more time to think about what I really want to do. Working as a trainee at an investment company, sitting alongside financial experts, is giving me a different perspective on money.
I’m thinking about stuff that I know others my age aren’t because of where I work.
I’m in a good position to learn about the journey to financial independence (as boring and serious as that might sound). So that’s what I’ve done and here’s what I’ve learned.
Step 1: Budgeting - knowing what I can afford
Like many people, I like eating out, going for drinks with friends and the occasional new outfit. However, I’ve also got rent to pay and groceries to buy. Learning to budget properly and sustainably is going to be a key part of my mission. How else will I know what I can afford and what’s worth my money?
Someone recommended the book In Love Is Not Enough: A Smart Woman’s Guide to Money to me and that’s been very useful.
Financial journalist Merryn Somerset Webb suggests a good way of making smart purchases is calculating the number of hours of work that goes into each item.
If you’re a school-leaver, you could well be earning the National Minimum Wage of £6.50 (for 18-20 year olds). In which case, that £30 dress in the sales will cost you nearly five hours of work. Do you really like it and how much will you wear it.
My plan: With the help of my colleague Claire, who is a financial adviser, I came up with a plan to spend money more mindfully by tracking my spending digitally and working out my monthly levels of disposable income. I am going to use this as a baseline for what I can and cannot afford.
Step 2: Saving - beginning to put money aside
A quarter of British adults have no savings, according to a study by Skipton Building Society. It also found one in ten typically spend more than they earn.
I might feel like I’ve got a way to go when it comes to understanding finances, but I do know that having money put aside means security – and freedom.
When I go to university next year, I will want to travel and to have a social life. I’m putting money aside now to fund all those non-essentials.
If your money is sitting in a current account where it is gaining no interest, the effect of inflation means it is likely you are actually losing money.
Read more: How chocolate helped me understand inflation
Let’s say you have £100 in a current account that pays little or no interest. After a year, you will still have £100 in your account. But if the rate of inflation is running at 2%, you would need £102 to have the same purchasing power that you started with.
Financial adviser Claire says of saving: ‘You should always start by having a cash savings pot for emergencies, aim for six months spending money as a minimum. Once you’ve got a cash nest egg, and if you are looking to save money for the longer-term, you might want to consider investing some of your money.’
My plan: I am going to look at different savings accounts, and shop around for the best interest rates on offer. Then I can work out how much I can afford to put aside and start building my savings for emergencies.
Step 3: Investing - getting started
Warren Buffett, the world’s best-known investor, once said: ‘Successful investing takes time, discipline and patience.’ I’m a teenager, so I guess I have time - but discipline and patience? Well, let’s say I’m working on it.
Claire said: ‘It is a bit like exercise. When you start it feels like hard work, but once you get used to it, it becomes second nature. You might even enjoy it. But the real reward is the results.
‘In basic terms, investing is about taking risk with your money for better returns. There are lots of online investment platforms offering risk-rated investment portfolios, which are a great way to get started.’
My plan: Once I have savings for emergencies, I will research and compare the different investment Isa platforms. I plan to start putting small amounts of money towards investing each month so I can get to grips with it, and not invest more than I am prepared to lose.
The journey to financial adulthood might seem long and arduous – but it’s much easier if you have some order to it. The really good news is it turns out I’m an investor already, because I have a pension. Tick. Not so arduous after all.
The views are those of the author. We cannot provide investment or pension advice; please speak to an independent adviser should you be uncertain what is appropriate for you.