A quick and dirty guide to the financial goals millennials should (and shouldn't) worry about
This summer, MoneyLens’ own Maggie Sullivan stumbled across a tweet that we think set an unrealistic savings target for millennials. The tweet suggested that by 35, everyone should have twice their annual income stashed away in savings.
Looking at the maths behind this, it is achievable, but it is also very ambitious. Assuming you start working at 23 and your salary only rises by inflation each year to the age of 35 (an admittedly conservative assumption), you would need to save around 18% of your pre -tax earnings to hit the target.
The target also presumes you won’t use your savings for any other purpose by the time you reach 35. What about buying a house, or paying for a wedding? What if you need a car?
Savings also means a lot of different things to different people. Your pension contributions are savings, but these are not funds you can access in an emergency. Where your savings are and what they are for is always worth consideration.
Here’s my own view on what you should and shouldn’t worry about… and keep reading to hear what my colleague Claire Walsh, a chartered financial planner, thinks.
So what should you worry about?
As a rough guide, I’ve broken the time between 23 and 35 into three separate phases. In each one, I outline what financial priorities you may wish to consider.
Age 23-26 - Clearing debts and safety nets
Just because the target is slightly unrealistic, it doesn’t mean that you shouldn’t save at all. Setting aside a bit of your salary every month should be a basic and essential part of everyone’s “financial hygiene”.
When you start working, you’ll probably be receiving a steady income for the first time in your life (pocket money does not count). Fresh out of university and maybe even after a bit of travelling, there’s a high chance that you’ve been skimming along at the bottom of your overdraft and/or credit card limits. This was certainly the case for me.
When I started working I had an overdraft of £1,200. At the end of every month, I was close to the limit and counting every penny. It limited on my social life and stressed me out. I also, on occasion, inadvertently exceeded my overdraft balance. That meant I was charged an infuriating £30 administration fee on top of the money I already didn’t have. But more importantly, I’d lost sight of what the overdraft facility was really for; emergencies.
The best thing I did was pay the overdraft off. It took less than a year and I barely missed the money I saved every month. Most importantly, it meant that I had a contingency again. If something went wrong, I now had a reserve that I could use if I really had to.
Once it was cleared, I moved on to my credit card, the balance of which was mercifully small at £500. It all added up though. I was paying the minimum amount off each month, and some interest. Which was stupid, because it was on a balance that took two months to clear.
Once those two debts were cleared off, I could start saving a couple of hundred pounds a month in an accessible cash-only Isa. I quickly had a modest pot of savings that I could use for rental deposits, holidays and a couple of suits that actually fitted.
Age 27-30 - “Free” money
Fast-forward a couple of years. You’re now a respectably-dressed young professional with an accessible rainy day pot tucked away of perhaps 20% of your annual salary. Now what?
Now you find out about free money. This sounds like I’m joking. I am not. We’ve already touched on the concept of “free money” here, but the reason people talk of “free money” is tax relief. A pension is basically a long-term savings plan with tax relief.
As explained by the Money Advice Service, here, money that would have gone to the government as tax goes into your pension pot instead.
Now before I go on, I am obliged at this point to remind you that any investment – even cash - carries a degree of risk. You may get less than you put in, and past performance is no guarantee of future results.
However, as of April 2017, all companies in the UK are required to offer company pension schemes by law. Employers must have a pension scheme in place, and workers will be automatically enrolled if they are aged over 22, earn more than £10,000 and are not already signed up to another plan.
MoneyLens’ Marcus summarises UK pension basics here.
Above-and-beyond the basic contribution from your employer though, you should find out if there is a “matching scheme” where you work. As we’ve discussed, your company will offer a basic contribution, but often if you decide to sacrifice some of your salary into the pension as well, your employer will match it up to a specified amount. If you can afford to do so, I would suggest you consider it.
Another way to make your savings go further is in something called a share incentive plan (SIP). If you work for a listed company - one that has shares traded on the stock exchange - there may be a way for you to buy some of the company shares. Often your employer will give you the same amount of shares free - again, up to a certain limit.
Be aware though, that these savings are not going to be immediately accessible. Your private pension pot cannot be accessed before you are 55 at the moment, and this will rise to 57 in 2028. Shares in incentive schemes are also usually “locked up” entirely for three years. Even after that, if you sell before they have been in the plan for five years, you will pay tax on them.
Claire Walsh, a chartered financial planner, emphasises that accessibility of your savings shouldn’t be underestimated.
“It’s a good idea for people of all ages to ensure that they’ve got some emergency cash savings. This includes your rent or mortgage payments, bills and food. In general aim for a pot which would cover your living expenses for 3-6 months. Consider how secure your employment is.”
Age 30-35 - Big stuff and speaking to professionals
Once you’ve got your emergency fund in line, the next step is thinking about long term goals. This is why it can be a good time to talk to a professional. Claire also has some suggestions here. She says although plans can change, having a five-year plan (or longer) for your money is very important.
“Timeframe is key when it comes to investments,“ she says. “If you are saving for a home deposit and intend to buy in the next couple of years, then you would want to retain this in cash. Perhaps you are thinking towards school fees for children, or more long-term investing.
“We’ve had a decade of low-interest rates and thus you may want to consider other options to cash for long-term savings. If you are earning over the higher rate tax threshold at this age, you should really be considering whether you should be putting the money into a pension because of the tax relief and considering this alongside other goals.”
It’s easy to get overwhelmed with finance. Almost no one feels they have enough money.
And everyone finds talking about it a bit stressful. We’re always reminded money is at risk, and to make things more complicated, what works for one person may not work for another.
My experience may be different to yours and nothing here should be construed as advice, but I found a bit at a time makes a huge difference.
In the words of C. S. Lewis: “You can’t go back and change the beginning, but you can start where you are and change the ending.”
Read more: Is investing for me?