Anna Sofat, Director at Addidi Wealth and unbiased.co.uk Financial Adviser of the Year 2014 winner, talks to us about financial planning for the young and young at heart.
Financial Planning is about understanding your dreams and life goals, knowing the resources you have available, and what you need to generate to help you achieve them. The sooner you start getting a financial and personal plan for yourself, the better the chance you will have to get to where you want to be in 10, 20 or 40 years’ time. It’s the old adage – it’s easier to achieve something that you are aiming for than to drift without having any goals.
Here are some of the things you might want to plan for if you are in your 20s or 30s:
- Budgets – setting sensible amounts for everyday life.
- Buying a home
- Getting married / having a family
- Being financially independent so you no longer have to work (you may want to but you don’t have to)
Looking at these individually, there are some basic building blocks to help you put together a financial plan.
Budgeting – the low down
Much of your 20s and your 30s is about making decisions and prioritising. From day 1, have a budget and make sure you are disciplined about it. The more you plan and have control over what comes in and what goes out, the better you’ll have to make things happen.
Budgeting is not rocket science. As a rough rule of thumb, look to save between 5-20% of your income each month, towards your medium/long term goals. There are also lots of apps to help you track expenditure. Within the budgets, allow yourself little treats so it’s not all about tomorrow!
There are lots of money saving ideas /schemes, from last minute holidays, money off vouchers for restaurants and student travel. It’s worth talking to friends to see what they are doing and get tips from them. If not speak to a financial adviser to help you find ways to save.
Is all debt bad?
No. Most of us start our adult life with student debt – payments to repay the student loan are automatically taken from your pay as soon as you start to earn over £16K pa. This is fine. Unless you have very generous parents who want to pay off the loan for you, I would leave it to the government to take the money from your salary.
Credit card /short term debt – as soon as you start work, you will be given credit by your bank /credit card companies. However, the hard truth (at whatever age) is that you have to live within your means – borrowing for holidays, short term loans between pay cheques etc. might be necessary on occasions but it should not become a habit.
If you have accumulated debt, then you will need to think about how best to repay this. If juggling credit cards to reduce the interest you are paying is too much, consider consolidating these into a small personal loan repaid over a short term of up to 5 years. The interest rate is usually lower on a personal loan than on many credit cards.
Longer term debt for buying a home is good debt. In most cases borrowing is the only way most of us will ever achieve our ambition to be a home owner. The more you put down as a deposit, the less interest you will pay so, if you have the opportunity to borrow from parents (especially if its interest free!) to have a lower mortgage, then financially it is likely to make sense. Under new mortgage rules, the lender will look at affordability and all your financial commitments, keep this in mind when you look at what you can afford.
How much could you save?
When looking to accumulate some savings, look at your numbers, think about what you can save and how long you need to save for.
If you are saving for less than 5 years, consider a cash ISA or a regular saving cash account as most of the banks offer attractive interest rates.
If you need to save for longer than 5 years, look at setting up a regular stocks & shares ISA to help boost your savings. Another option here might be a share save scheme if you work for a big employer as these are tax efficient (you may save on tax & national insurance).
Pensions – if your employer is offering to pay into a pension for you, take up the offer; there are good tax breaks and your older self will thank you!
The bank / hotel of Mum & Dad
Finally, if you are fortunate enough to have parents with financial means, then don’t look to them to bail you out. Do look to them for guidance and help if needed. They made it to a great financial future, they could help you do the same.
About the author
Anna Sofat, founder and Managing Director of Addidi is a highly qualified and experienced wealth adviser. She has 20 years’ experience of advising private clients and managing financial advisory firms.
Anna holds both the Chartered Financial Planning and Certified Financial Planner qualifications. In 2012 and 2013, she was nominated one of the Top 100 Advisers by the New Model Adviser magazine.