Five financial lessons I learned this year
If someone told me just over a year ago that I would be writing about money, I would have thought...
The good thing about being a millennial, who’s writing about investing for millennials, is that you know a ton of other millennials who you can lowkey interrogate for ideas. Right? Wrong. It turns out that my friends, at least, are not the wealth of information I thought they’d be (pardon the pun). In reality, they just have very basic questions that they been too afraid to ask before.
The most questions I get, when I broach the subject of saving and investing, are about purchasing a house. Mainly because all of them fear never being able to buy one. They don’t understand the process and prices just keep going up.
In the meantime, in no particular order, I’ll have a go at answering some of their other questions.
‘I am all for trying to teach household finance in schools, starting as early as possible…I think learning about compound interest is at least as important as trigonometry’
– Richard Thaler, recipient of Nobel Memorial Prize in Economic Sciences 2017
When you save or invest money, you are sometimes paid interest. Let me use a simple example. You invest £10,000 and get paid 5% interest over the course of a year. At the end of that year, you have £10,500 – the initial sum (£10,000) plus the interest (£500). At the end of the second year you have £11,025: the new ‘initial sum’ of £10,500 plus £525 interest.
You’ll notice the interest payment is larger in the second year. That is because you are being paid interest on the initial sum and the interest you got the year before. You are being paid interest on your interest – that is compound interest. Albert Einstein loved it so much he described it as the eighth wonder of the world.
Great, huh? But beware. It also works its magic on your loans. Take a credit card bill for example. If you have £3,000 on your credit card with an interest rate of 18% per annum calculated monthly, you will owe £3,586.85 after one year and £4,288.51 after two years. It soon adds up, so pay off your credit cards if you can!
There’s no hard and fast rule for this one, but a good guide has always been three to six months of your rent and expenses. Everyone’s life is different, and you never know what’s around the corner. So it’s a good idea to have a healthy cushion should you fall on hard times.
But don’t make the mistake of thinking your emergency money is just part of your savings pot. Although you shouldn’t, you might dip into your savings from time to time for a cheeky getaway weekend or maybe a fancy Christmas present. Your emergency fund is not for that – it’s just for emergencies and, if possible, it’s a good idea to keep it separate from your savings and investments so you’re not tempted to use it.
This is a tough one as I know from my own experience that rent does take up a large part of your wages. But I think here it is important to understand that you don’t need to invest a big lump sum – you can invest a smaller monthly amount, which may be more manageable.
Most of us, if we are honest, could save £30-50 a month by missing one night out, not spending so much on coffee every morning, or walking/cycling instead of catching the tube or bus. And if you set up a direct debit, it will go out of your account automatically and be just like any other expenses.
Another good habit to get into is to increase your savings by the same percentage as any wage increases you get – as soon as you get one. What you haven’t had before, you won’t miss and it’s an easy way to increase your savings.
The first thing you need to consider is what you want to achieve with your investments. Is your primary purpose of investing retirement or maybe saving for a house? Or, do you have another goal in mind, maybe a new car paid in full? A wedding? You need to know how much your pot of money needs to be in the end and then work out how much you need to invest to achieve it. Work backwards in the calculation.
The amount each person can invest varies on their personal circumstances, so think about how much money you can reasonably put aside each month without taking from your emergency money or relying on credit cards.
One thing I can tell you is that the earlier you start saving, the smaller amounts you can save – due to that lovely compound interest I explained earlier. The later in life you start investing, the larger the amounts you’ll need to put aside to reach the same goal. So try to save as much as you can as early as possible.
A final thing to remember is that any money in an investment account is typically better earmarked for a goal that’s at least five years away, because you’re probably subjecting your money to some level of risk.
Pretty much all of them – or at least enough to give you a very good choice. If we are talking about investment funds, which is our area of expertise, you can put money into ones investing in equities, bonds, commodities or property or a combination of all. There are more than 3,000 different funds available and you can usually invest as little as £50 a month in any of them.
Yes. You may not get back the original amount you invested, as the value of an investment can fall as well as rise, but you can get what is there back. It may take a few days for the money to get to your bank account but it is pretty quick.
If you put money into a cash savings account, assuming it’s not a fixed cash saving account, you get your money back too – you just may not get all the interest payments if you haven’t had the money in the account for long enough.
Someone recently said to me, ‘the question isn’t at what age I want to retire, it’s at what income’ and that got me thinking. If I multiplied my current expenses for the year by thirty years of retirement – that’s a tremendous amount of savings to have in cash.
Another way of looking at it is that a 30 year retirement is the equivalent of 780 two-week holidays. Do you want to spend those holidays at home, on a cruise or in a five star hotel? Everyone’s answer will be different, and will depend on a number of factors, including where you live, what it costs you to live, and even how long you expect to live. But if you want to spend your retirement doing the things you like, you need to be able to afford them.
When you save into a pension you will receive and annual statement that tells you how much you can expect to receive per annum when you retire. So this is a great way to check if you are on track or not.
In terms of pension product, a good one will give you a good choice of funds and assets in which you can invest, will be easy to use (usually online or you get good communication from the pension provider) and will not have high charges.
In terms of an outcome, a good pension will give you enough for the basics (food, utility bills, rent, etc) and a bit extra so you can enjoy the nice things in life too.
If you need a loan, a mortgage or a credit card, the person or company lending you the money will want to know if you are going to be able to pay it back.
To help them assess how risky you are as a borrower, they will ask you questions about how much debt you already have, if you have any credit cards already and if you pay them off monthly, if you have ever missed any mobile phone payments, etc. The information you give is then used to calculate your ‘credit score’. Each lenders’ credit calculation and score will be slightly different, but generally, the higher score you have the less risky you are deemed to be and the more likely they are to lend you the money.
If you are refused credit because your score is too low, it is important you find out exactly why. Your credit score can take a long time to ‘improve’ if it gets away from you, so it’s important to look after it. It’s suggested you check your credit score online for free, once a year, to ensure it’s accurate and no one is using your name to rack up a load of debt.
The Bank of England sets the UK’s base interest rate. This rate is then used by banks and building societies to determine how much they will pay us in interest on our savings and how much they will charge us in interest on our loans and mortgages.
In very simple terms, when interest rates rise it’s usually good news for savers, as they will get more interest, and bad news for borrowers as they will have to pay more interest.
The Bank of England will generally increase interest rates if the economy is growing too fast and inflation (the cost of things) is going up too much. It will usually lower interest rates if the economy is slowing or in recession or if inflation is falling too much.
There are other, more complicated effects, but that’s probably enough information for now!
Do you have other burning questions you want answered but are too afraid to ask? Email firstname.lastname@example.org