- By Malcolm Anderson
- Published 02/20/2012
The UK Government has reported that workers aged 18 to 24 are now the most likely demographic to take on debt which leads to severe financial difficulty and even bankruptcy.
It’s easy for young people to accrue insurmountable debts when studying at university, and as graduates, and once they start earning an income, they can only expect to start at a low salary (especially in the current economic climate). In addition, young people tend to be notoriously bad at being thrifty with their personal finances.
From reliable savings vehicles such as ISAs to learning to control spending habits, the following guide is aimed at helping young people manage and maximise their finances, so they don’t end up in hot water.
Emergency Funds & Savings for the Future
Whether you lose your job, want to move or suddenly need urgent medical care, you never know when unforeseen but necessary expenses will present themselves. It’s wise to work towards saving at least three months’ worth of living costs as an emergency fund.
All in all, while it might seem impossible on a graduate salary, do try save at least 25 – 30% of your monthly pay cheque as before you know it, you’ll be facing major adult expenses such as taking out a mortgage and having children.
Banks are making ISAs for young people available, so young adults could take advantage of these efficient savings vehicles. In a nutshell, the benefit of ISAs is that the government gives you an annual tax-efficient allowance on the savings invested, meaning you get to keep more of your hard earned money. Cash ISAs are the safest route, and they generally allow for fast and easy withdrawal of your funds if you suddenly need them.
Stocks and Shares ISAs are your second option. They can also potentially deliver great returns, since you will earn good profits if your investments do well on the stock market. The market is subject to extreme ups and downs however, so unless you’re financially savvy, it’s a good idea to consult an Independent Financial Advisor who will help you grow your savings.
Speaking of risks, if you do go for the route of a Stocks and Shares ISA, be aware of one of the most important rules when it comes to investing – avoid put all your eggs in one basket, be sure to diversify with a varied portfolio. That way, if one of your investments suffers a downfall in the stock market you won’t risk all your savings. The eligibility to invest in an ISA will depend on your individual circumstances, and all tax rules may change in the future.
Chip Away At Your Debts
If you have student loans and/or credit card debts, it’s best to pay them off as soon as possible, since they will swallow your hard earned money needlessly. Forcing yourself into a few months of thrifty penny-pinching to settle what you owe will mean you’ll have more cash to save or enjoy later. What’s more, following recent changes in the UK’s pension scheme, young workers are expected to receive £43,000 less than expected during old age, so it’s more important than ever to be debt-free and start saving money.
Investing In Your Career
If you want to get ahead so that you can achieve a comfortable salary, you will have to invest in key necessities such as the right corporate clothes, industry publications and perhaps further skill enhancements such as a computer software course. While this outlay will initially hurt your bank balance, it could see you earning a promotion which will boost your finances. The trick however is to be savvy about this – take the time to hunt for good bargains.
Hedge Your Dreams
Much as you may love doing something; this does not always mean it will pay for your daily expenses, much less allow you to live comfortably. While pursuing your dream is admirable, do be realistic about its potential for reasonable financial success and also hedge your bets with other commercial skills while you’re young enough to easily develop them.
For example, if your heart’s desire is to be an actor and you feel absolutely destined to be the next Robert De Niro or Brad Pitt, certainly go to as many casting interviews as possible to make it happen, but on days when you’re not called in, why not take a course in software design or some other commercial skill that you find interesting?
Down the line, you might be paid a bundle to do what you love, but if it doesn’t work out, you will then have a second option to fall back on. Another tactic to consider if you’re struggling to get your dreams off the ground while having to work a day job to cover essential expenses is to build a small nest egg of savings – that way, you could buy yourself perhaps six months to purely focus on your heart’s desire.
The most important financial advice for young people is to take action and be savvy with your money. From protecting your hard-earned cash from taxation with ISAs to sticking to a budget so you can chip away at your debts, there are a number of small actions you can take which will have a big impact on staying financially afloat. Please remember, the value of investments can go down as well as up and you may get back less than you invested.
About the Author: Malcolm Anderson is an independent journalist writing about ISAs