Graduates Personal Finance Top Tips
- Ease yourself into the world of finance and treat it as another academic project!! Apply yourself to it and get to understand it – boring but useful! Play a game with it if it helps.
Get an app or go to: https://www.fieldingfinancial.com/personal-finance/check-your-cash-flow/ and go to our wealth wizard – and get used to recording what comes in and what goes out.
The idea is to get control of your money whilst it’s small and then that helps going forward as you earn more.
- Avoid consumer debt at all costs – and that’s debt to pay for stuff that’s wastes away quickly and needs to be replaced: like sparkly shoes, clothes, or TVs.
Let’s assume that fancy TV costing say £1,000 is bought on a credit card which charges interest at 18% (which is standard at the time of writing) for unpaid balances, and that the minimum payment made each month on the credit card balance is 2%.
It will take an amazing 37 years to pay off that credit card debt if only the minimum is paid each month. THIRTY SEVEN years! Sadly, that TV would have been in the land fil many, many years before then, and this kind of consumer debt can be enough to keep you in poverty all your life: that one simple silly thing can destroy all your financial hopes and dreams so PLEASE don’t do it.
Watch interest rates: anything up to 10% is probably acceptable; anything over that or in double or triple digits DON’T DO IT!
- Don’t ignore money or before you know it you’ll be in a tricky financial situation that’s increasingly difficult – and longer - to recover from. Take responsibility for your money and learning about it: have fun with it and enjoy it but with a sense of awareness and responsibility. Read articles like this!
- Think about your future! Very small amounts of money saved now will grow to massive amounts in the future. Aim to save a minimum of £50 per month into some long term savings plan – an ISA or SIPP - and increase that until you’re saving 10% of everything that you earn. You may be offered a company pensions scheme when you get a job – JOIN IT – and take the maximum contribution from the employer. For instance, they may match your contribution up to say 5% - so if you input 5% and they do 5% that’s your 10% done at half the cost to you.
See Michael’s story below.
- Enjoy whatever money you have: it’s fun and you’ll enjoy it a lot more if you’re in control. Budget for fun: outings, holidays and put aside money for that. you’ll always regret money fruitlessly wasted.
Don’t be afraid of money: after all it’s just pieces of paper with pictures of dead people on the back!
Michael is 22 and has recently graduated and has a pot of money saved in a SIPP (Self Invested Personal Pension) that his mum ie me - saved for him!
As it’s in a SIPP pensions structure he will only be able to withdraw any of it (unless the legislation changes of course) when he retires. At the moment, for his type of pension that’s the age of 55 and that age will rise to 57 in 2028 and I suspect it will keep rising beyond that – so for the purposes of this exercise I’ve assumed that he won’t be able to get his hands on any of the money until he’s 67!
However, what that means is that his money has a very long to grow, and his £35,773.14 will grow to £523,325.79 by the time he’s 67 (in 2062 on the assumption that he creates a 10% annual return, pays his (ever increasing SIPP annual fees) and doesn’t add or subtract anything in that time.
Now that’s not bad but he can do much better.
If he has another two year break from making any contributions (there’s been nothing paid in since he was 18) whilst he looks for employment but he then gets a career type job and then starts making a small £50 per month contribution (annual contribution of £600) in 2019 and keeps that up each year, it increases his pension pot by the age of 67 to an amazing £903,111.64!!
And it gets even better than that! If he makes that contribution the tax man HMRC will add tax relief to that at Mike’s personal tax rate – which let’s assume is the basic rate of 20% - and that increases his final pension pot to £979,068.81.
It’s worth saying that all again and slowly. A simple savings scheme started by his mum when he was born, with contributions made until the age of 18 and then continued from the age of 25 at only £50 per month can provide a retirement pot of about £1 million!!!!
It just goes to show how powerful compounding over a fairly long time can be with quite small amounts of money.
Now who knows what that money will be worth, or be able to purchase, in 45 years time, but as long as the investment return of 10% is higher than the rate of inflation (currently about 2%) then his money will ALWAYS be worth more in the future than it is today so that’s a positive and encouraging thought.
In addition, it will be a £1 million pot that he wouldn’t have had otherwise and it will certainly help.
Also, sadly, it will be a £1 million pot that many others will NOT have unless they take the same action.