Setting new financial goals can be a daunting task. So daunting in fact, that the majority of Generation Y (those born between 1980 and 2003) have avoided the task altogether. A Scottrade study discovered that 60% of Generation Y admitted to not thinking about retirement at all.1 Those poor spending habits are not isolated to the younger generations either. Unfortunately, the Office for National Statistics recently published a study that found UK households were only saving 3.3% of their income in 2016 — the lowest proportion it’s been since the statistic started being recorded in 1963.2
No matter your age, it’s never too late to start saving! There may be many years between you and your pension, or it may be right around the corner. The important thing is that you start somewhere! Start getting your finances in order with these good financial habits.
You’ve just started your first full-time job — congratulations! This may be the first time you’ve received a paycheque of this amount, and you may not know how to handle it. While it’s tempting to spend it all, take a look at these suggestions first.
Step 1: Establish a Budget
- One of the most common mistakes young people make is spending their paycheque without allocating it to the proper places first. Have a plan for every time you get paid. Make sure you allocate for housing, car insurance, fitness memberships, groceries, etc.
Step 2: Pay off Your Debt
- You’re financially running in place if you are saving aggressively while staying deep in debt. If you are just paying the minimums on your credit cards to help set more money aside for savings, you’ll most likely end up spending more over time with APR fees. Set up acredit card payment plan, starting with the credit card that has the highest APR, and work your way down.
Step 3: Work on Building Your Credit Score
- Experts suggest following the “30% Rule” for a stronger credit score: Avoid carrying a balance of more than 30% of your total credit limit. For example, imagine you have three credit cards with a combined credit limit of $10,000. You have a balance of $2,000 on card A, $1,000 on card B and $1,500 on card C. Even though you don’t have $3,000 (30%) on any one card, you still have a balance of $4,500 in total — well above your 30% goal.
- Always pay your rent on time! While you may not be ready to mortgage a house right now, you might be in the future — you’ll need a good credit score for that. When you rent, you’re building your credit history. Make sure you’re building a good reputation with on-time payments.
Step 4: Start a Social Savings
- You’re at a great stage where life starts to take a lot of interesting twists and turns. Weddings, babies, spontaneous trips — your social life can be very exciting and very expensive. In addition to your normal savings account, start tucking away small amounts for special social events that you know are on the horizon. That way, when wedding gifts or hen/stag parties come up, you don’t have to break your budget.
If you haven’t met all your financial goals for your 20s, start there. The goals of your 20s are the foundation of any budgeting plan and help you get to a stable financial baseline. If you’ve met all the targets above, your financial health is good! Here are some other financial habits you can start building on.
Step 5: Start Contributing to Emergency Savings
- Establish a “Rainy Day Fund”: the amount it would cost you to cover rent, utilities, groceries, car payments and other essentials for six months in case of unexpected unemployment. The goal is to help you stay out of debt while unemployed and keep you on track for when you are in between jobs.
- If you already have that amount tucked away in savings, good for you! Continue saving at a rate of 10% of your annual salary each year. If you can, increase your target by 2% annually.
Step 6: Set Your Pension Goals
- By now, you are probably settled in your career, might have a spouse and potentially own property. It’s time to reflect on what your goals are, individually or with your spouse. Set up proper expectations for the level of comfort you’re looking for when you retire from your career and how much you can expect to save between now and then. Be honest about your lifestyle — it’s better to save more rather than less.
Step 7: Diversify Your Portfolio
- Meet with a financial planner to see if there are any opportunities for you. If so, discuss which ones are best for you based on your savings plan you already have in place. The recommendations of the financial planner may alter the plan you have for yourself, so make sure you reflect on the long-term risks before diving into any investment.
You are halfway through your career and in the latter half of your savings plan. Your pension is right around the corner. Are you ready? As before, make sure you check the boxes from your 20s and 30s to ensure you have a strong foundation before you progress into these suggested goals for your 40s.
Step 8: Ask to Earn More
- If you are still feeling behind, consider a simple route to saving more: earning more. Many employees settle for salaries when they could ask for a small raise that could add up to a big difference. For example, say you earn £50,000 a year. If you settle for a 3% annual cost-of-living increase rather than negotiating a 5% annual raise, you’ll have lost nearly £950,000 in potential earnings by age 65. Use websites like Glassdoor to check salaries within your industry to support your negotiation.
Step 9: Reassess Your Standings
- The best financial habit you can build is to always check in on your goals and never let them go stagnant. Your rent can change, you could switch jobs, you may get married — many moments in life not only affect your day-to-day schedule, but your finances as well. When big changes come up, take the time to examine how they will affect your budgets.
A pension may seem like a while away, but planning for tomorrow starts today. Each small step you take now will help alleviate stress down the road and provide more financial opportunities. From saving small to working up emergency savings, there are a lot of ways you can save — choose what works well for you and your budget. You may get overwhelmed or frustrated, but your pension saving strategy is more like a marathon than a sprint. When you cross that finish line into your relaxing work-free zone, it will all be worth it.
1 New research on retirement saving: Gen Y is generation procrastination. (15 March 2011). Retrieved 13 June 2017, from https://about.scottrade.com/news/releases/2011/New-Research-on-Retirement-Saving-Gen-Y-is-Generation-Procrastination.html
2Jackson, G. (31 March 2017). UK household saving rates hit record lows in 2016. Retrieved 12 June 2017, from https://www.ft.com/content/159d7f46-15f2-11e7-b0c1-37e417ee6c76?mhq5j=e2