Let’s be honest. Managing your money in your twenties can be a real pain in the bum. Whether you want to travel the world, buy your own home, set up your own business or start a family, it can be really hard to juggle day-to-day essential living costs with life’s big milestones. So when financial experts tell us that we should be investing in our twenties, it can be hard not to laugh in their faces before crying into a glass of cheap supermarket wine for the third time in a week.
It goes without saying that for far too many 20-somethings, investing simply isn’t possible due to ridiculously high living costs and depressingly-low wages. However, if you are in a fortunate enough position to have money to put towards your future, or you’re able to tweak your budget and free up some cash, it’s definitely worth doing so. Here are a few things to take into account.
[Please note that I have no financial qualifications and therefore nothing in this post should be considered financial advice. This post is purely designed to help you weigh up your options so that you can do further research or seek professional financial advice]
Compound interest needs time to work its magic
The number one reason to start investing in your twenties? Compound interest.
In short, compound interest is the interest you earn on top of the interest you earn. Let’s imagine you invest £1,000 and it earns an average of 3% interest each year. Taking this interest into consideration, after 12 months you’ll have £1,030. In year two, you’ll be earning 3% interest on a larger sum of money.
Even if you didn’t invest any more money yourself, after 40 years, your initial £1,000 will have grown to £3,262. Your £1,000 deposit will have been snowballing around, collecting more and more compound interest each year.
Here’s another example of how crazy compound interest can be:
Louise is fortunate enough to be able to start investing aged 25. She invests £100 every month for 40 years. Let’s imagine every month she gets a 1% return on average. By the time she’s 65, this figure has grown to £1.17 million. Keep in mind, she only contributed £48,000 of her own money herself. The rest of the money came as a result of compound interest.
If Louise was to wait until she was 55 to start investing, even if she invested a whopping £1,000 every month for 10 years, she wouldn’t have half as much as she would in the first example. In fact, her savings would only have grown to £230,000. Over the course of 10 years she’d have contributed £120,000 of her own money.
It really does go to show that time is your friend and the sooner you start investing, the better – even if you’re only investing a small amount.
Make sure you have an emergency fund
As wise as it is to invest as early as possible, you need a solid emergency fund before you start investing significant chunks of your cash. After all, the most rewarding investments tend to be long term and in the event of an emergency, you won’t necessarily be able to access the money you’ve invested. As a general rule, it’s a good idea to aim towards saving at least 3 to 6 months of living expenses saved in your emergency fund.
If you don’t yet have an emergency fund, you may be wondering where to start. Your first step should be to assess your current income and expenses. How much money do you spend each month and where exactly is it going? If you don’t keep track of your money, it’s amazing how quickly it can disappear without you really understanding where it’s going.
I recently discovered evestor‘s money management app, me&mymoney. It lets you see all your bank accounts in one place, track each transaction, and even manage any debts that you may have. If you’d like to manage your finances and build your savings, I’d recommend giving this app a go.
Pay off your debts before investing
In most cases, it’s best to pay off your debts before your start investing. This is particularly true if you have expensive debts that are accruing interest. After all, compound interest is applicable to debt too, but in reverse!
The longer these debts are left to snowball, the more money you’ll be wasting on interest unnecessarily. By making debt repayments a priority and throwing as much money as possible at them, you’ll potentially save hundreds or even thousands in interest, depending on how big your debts are.
Saying that, if you’re a homeowner with a mortgage, you may wish to seek financial advice to determine whether you’re best off pouring extra money into your home loan, investing or doing a bit of both at the same time.
I recently made the decision to start overpaying on my mortgage by £20 a month in a bid to reduce the amount of interest I owe and pay off my home debt sooner. I’ve not yet started investing in the traditional sense (stocks, bonds, etc), but this is something I hope to start as soon as my finances are more stable. Having recently bought my own home, right now everything’s a little up-in-the-air for me.
Saving for big life milestones
Since investing should always be thought of as a long-term commitment, it’s important to think about the money you’ll need in the next few years.
For example, if you’re not yet a homeowner but you’d like to be, it may be wise to either make your deposit your number one priority or save for your first home while gradually building up your investments. Let’s imagine you have £300 leftover at the end of each month. You may decide to put £250 in a savings account, high interest current account or cash ISA for your deposit and invest the remaining £50 for the long term.
Some people make the mistake of thinking that investing is a suitable way to save a deposit. However, considering the risks involved and the need to lock your money away for a long period of time, this is risky, particularly if you’re hoping to buy a home within the next 2 – 5 years.
*Research Help to Buy ISAs and Lifetime ISAs if you haven’t already
Saving for retirement
Retirement planning can be tricky, particularly since it’s difficult to determine what age we’ll retire, the type of support we’ll get off the government (if any), and the amount of money we’ll need each year. However, don’t let all this uncertainty discourage you from preparing for retirement. Compound interest applies to retirement savings just as it does with investments, so use it to your advantage! The earlier you start saving for retirement the better.
Generally, workplace pensions are hard to beat because your employer will pay into your pension as well as you. Your contributions will also benefit from tax-relief.
If you’re self employed or you don’t want to make use of your workplace pension, private pensions might be worth considering. Compare the different options available before choosing the one for you.
Alternatively, there’s the Lifetime ISA. This was created by the government to help people save for retirement and a home deposit at the same time. You can put up to £4,000 a year into your Lifetime ISA and you’ll benefit from a 25% top up from the government. So, if you were to put the full 4k in this year, you’d get a nice £1,000 bonus from the government towards your first home or retirement. You can withdraw the money for other things if you wish, but you won’t benefit from the government top up on the money you withdraw and you’ll be penalised with a 5% charge on that withdrawal.
Ready to invest? Here’s one place you could start…
Earlier in the post I talked about evestor’s brilliant money management app, me&mymoney. Evestor’s also a great place to start if you’re looking to invest as it gives you the following benefits:
- Start investing from as little as £1 with no initial fees
- Low annual fees of less than 0.53%
- See your investments 24/7 on your desktop or with our app
- Get advice on evestor products at no extra cost
As I’m somewhat of a beginner when it comes to investing, I spoke to the evestor team to get their top tips. This is what they said:
- Get yourself in the mindset. Saving and investing can be daunting, especially if your target is to buy a house or a car, this can seem unachievable when you’re starting from zero. It might be easier to think of it in smaller steps. Now you can invest from as little as £1, which hasn’t always been an option, so start low and build it up as you get more comfortable with managing your money.
- Your starting point should always be to address any existing debts. Everyone’s ability to save and invest is different, especially when you’ve just started to earn an annual salary and finding the best way to manage your income. Any leftover funds should be used to get back into the red, whether that’s paying off your credit card, or addressing any IOUs with friends and family. The only exception here is your student loan, which you can expect to pay off in small chunks over some time.
- Next, concentrate on building up your rainy-day fund, which will help to pay for unwelcome surprises like a broken down car. This is intended to give you peace of mind. The equivalent of your monthly salary is usually enough to cover this.
- Once you’ve started to build your savings at a pace you can sustain, don’t leave your money languishing in a cash account when it could be invested to earn better long-term returns. For example, stock and shares ISAs typically make your pound stretch further than a cash ISA, which offer low interest rates.
- Be smart and seek advice when deciding what to do with your extra cash. Saving is meant to take the stress out of your life so never make an investment decision that you do not understand or that will keep you up all night with worry. It’s up to you to decide on the level of risk you are prepared to take, but this doesn’t mean taking a shot in the dark, and risk should be carefully considered if you want to start your investment journey off on the right foot.