For many millennials, your twenties and thirties are a time to find your way and start building the foundations for future success. This should include having strong financial foundations in place. By following these simple steps, you can start on the journey to unlocking your financial freedom.
When you are starting out on your career finances can be tight. It is important that you have a grip on these as early as possible, and are not living from month to month.
One way to start focussing your monthly finances is to look over your bank statement from last month and see where you actually spent your money considering whether any of the purchases you made were essential. By doing this for a few months you can easily identify where you can make savings in your monthly expenditure. The most common areas where reductions can be made are on eating out, takeaways and unused gym memberships.
A good way to look at the monthly budget is to consider the 50/30/20 rule, where 50% of your income is spent on essentials such as rent, utilities, transport, the next 30% is spent on flexible desired costs such as phone bills, food, clothing, going out and then the final 20% should be used for saving and debt repayments.
It can take a while to get to the desired position where you are saving 20% of your monthly income but it is a good rule of thumb and excellent habit to get into. If you are not yet able to save 20% of income, challenge yourself to find ways to reduce your other spending so that you can be saving more.
If you have unsecured debt, repaying this as quickly as possible should be your number one priority as debt is expensive and it can weigh down your financial strategy for the future.
Make sure you have assessed the way that you are repaying your debt, have you considered all the finance options? If you have a balance on your credit card for example you can do a balance transfer to an 0% credit card and look to overpay the minimum payment each month allowing you to eat into the debt faster. The quicker you repay debt the more you will have available to put towards your savings.
As a rule of thumb everyone should have at least 3 months income saved. Ideally the cushion would be up to 6 months expenditure set aside for those unexpected costs that come with life’s unpredictability. The best place to house these emergency fund is in an account that provides you with instant access. Make sure that you have also shopped around to get the best interest rate you can.
As well as considering what savings and investments you can be making, it is important to ensure that you have sufficient financial provisions, in place now, for your family should the unexpected happen.
It is very important to make sure that you have sufficient life cover to repay debt such as mortgages, personal loans, credit cards. Life insurance when you are young is relatively inexpensive and by taking it out now, you can make savings over the longer term.
Also consider what would happen to the family finances if you were unable to work for a prolonged period of time, do you have sufficient provision for this eventuality or would you be best paying for insurance to cover this.
Although retirement may seem like an eternity away it is important to start saving for your retirement as early as you can. Under auto-enrolment all employers must now provide employees access to a pension arrangement and contribute towards it, so, you will automatically become a member of a pension scheme. Contribute what you can to this and find out from your employer whether they increase the amount that they will contribute if you pay in more. Employer pension contributions are essentially extra money for you so make sure you are getting the most out of what your employer offers.
If you have an emergency fund and have money left over each month you can invest this to achieve your medium to long term goals. It is important to note that if your goal is to use this capital within the next 3-5 years then investing is not likely to be appropriate and you should be saving in cash.
If you are investing then make sure that you have a diversified portfolio, the easiest way to do this when you are starting out on your investing journey is to invest using funds, they will aid with reducing your risk and when the market drops, as it inevitably will do, you are more likely to minimise your losses if you have a diversified portfolio.
Costs can also have a big impact on the overall performance of investments so make sure you consider these in any of the investments that you are making. Investment funds can range from as low as 0.25% per annum for passive funds through to over 2% for actively managed funds so it important to make sure that the costs will not impact on the investment performance too much.
You will undoubtedly hear your peers talk about the latest hot investments, for example, cryptocurrencies. Don’t get drawn in to taking risk with your money that you are not totally comfortable with. Only invest in things that you understand and that provide you with a broad diversified portfolio. With technology, it is so easy to invest in a plethora of things, particularly through crowdfunding sites but most these investments, by their very nature, are very high risk and should only form a small percentage (if any!) of an investment portfolio.
Finally, as you travel on your financial journey you will inevitably benefit from the knowledge and expertise that a financial planner can bring, the earlier you engage with a financial planning professional the greater the benefit to your finances. They can ensure that you have a coherent and robust financial plan in place to ensure that you achieve your financial goals and ambitions over your lifetime.