Your twenties and thirties will be a period filled with significant life and careers events, and as you reach certain milestones, your financial circumstances will evolve rapidly. Your needs as a carefree twenty-something will likely be very different to when you start to accumulate assets and responsibilities in your early thirties. We have set out below what you should consider at several key stages during this crucial period that will help set your finances on the right track. This is not an exhaustive list, but we hope it will serve as helpful starting points for you, and our investment managers and advisers are available to discuss any of the topics in more detail should you wish to.
Early stages of your career
Short term cash savings: As the COVID-19 outbreak has shown, the jobs market can be precarious, especially in the early years of your career, therefore cash savings are an important buffer that you should look to build up. Three months expenses in cash is a good place to start. This should be in an easy-access account, and although it won’t earn a lot of interest in the current environment, it will give you some breathing space in an emergency. You might also start saving for a house deposit along side of this.
Longer term investments: retirement may seem a long way off, but it is never too early to start looking to the future, and thanks to the friendly effects of compounding this can make a huge difference.
In the scenario illustrated above, the total value contributed to the investment portfolio and the assumed annual return is the same, however, the cumulative portfolio value at age 65 is significantly different. Therefore, starting to save early can give you a huge head-start. It can be worth getting in the habit of saving a portion of every pay rise – you don’t miss what you have never had, and your older self will thank you.
When saving for the long-term, make sure you are using all the available tax-efficient allowances: your annual ISA allowance is a generous £20,000 per year and you can save up to £40,000 gross in a pension, depending on your earnings. It is also worth considering any company share options or savings schemes, and these will need to be taken into account when constructing your investment portfolios.
One final point is not to be ‘recklessly cautious’ with your long-term investments. This portion of your investments can have an investment horizon that spans multiple decades, so it is important that it must keep pace with inflation. Holding cash in the short-term is low risk, so it is suitable for funds you have immediate needs for, such as a house deposit, the impact of inflation over the longer term can significantly reduce the real value of your assets. The chart below demonstrates this impact over the last 20 years using the UK Consumer Price Index inflation data. We believe this is a powerful argument to consider a range of investment strategies that incorporate suitable levels of risk and return, appropriate for the time horizon involved and your circumstances.
Mortgage and property
A property purchase will likely be the first major financial commitment in your life. In general, you will need a deposit of at least 5%, and although there are mortgages that require less, the interest rates will often be unattractive. With housing affordability at historic low levels, you might wish to take advantage of some of the government schemes available, such as Lifetime ISAs or Help to Buy and the stamp duty savings for first time buyers.
You will most likely have to take out a mortgage too, and whether you are looking to buy a property for the first time, or you have an existing mortgage, a mortgage adviser can help seek out the best deal. You will then need to review your mortgage periodically and when a fixed rate offer expires.
If you are buying the property with someone else, it is then worth thinking about how the property is held – as tenants in common or as joint tenants. With a joint tenancy, both partners jointly own the whole property, meaning that if something happens to one the property automatically passes to the other. With tenants-in-common, each own a specified share.
Aside from planning for the perfect day of celebrations with friends and family, it is also a good time to start planning aspects of your joint finances together: for example, will you pool all your resources, or keep separate pots for saving and investments? It may also be a good time to think about putting in place a will, and worth noting that marriage invalidates any existing wills you might have.
This can be another financial crunch-point for couples, as one party pares back their work to take on childcare responsibilities, either temporarily or permanently. The changing work circumstances and its impact on pension savings and National Insurance contributions should be reviewed and addressed.
It is also a good time to think about life insurance, and critical illness or income protection, which can act to protect your family should something unexpected happen. This is particularly important if you have a mortgage. All insurance arrangements should be reviewed periodically to make sure they are still appropriate.
If resources allow, you might then wish to consider saving plans for the children. Do you want to educate them privately? If so, the earlier you start saving to fund this, the better. Junior ISAs can also be a useful tool for longer-term planning but won’t be the right option for school fees because they belong to the child. Your own ISA allowance might be a better option in this case. If grandparents would like to contribute, bare trusts might also be suitable vehicles.
At every stage
Your financial circumstances and investments should be reviewed regularly to ensure the set up remains suitable and meets your long-term objectives.
Whatever your situation, objectives and goals, contact us to find out how we can help.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.
Investment does involve risk. The value of investments and the income from them can go down as well as up. The investor may not receive back, in total, the original amount invested. Past performance is not a guide to future performance. Rates of tax are those prevailing at the time and are subject to change without notice. Clients should always seek appropriate advice from their financial adviser before committing funds for investment. When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.