Four steps young people should take to improve financial resiliency
Whether you’re a young person or you have children and grandchildren, it’s important to start building financial resiliency early after research revealed 73% of young adults don’t have an emergency fund.
Despite many people in their early thirties planning significant life milestones, such as buying a home or starting a family, research suggests they aren’t in a position to do so financially. Across the UK, those aged between 30 and 35 have been identified as one of the least financially resilient groups.
A combination of low savings and a lack of confidence in finance is leading to major life events being put off. With many in this generation focusing on the present, research from LV= suggests that the current generation of 30-year olds aren’t preparing for risks they may face in the future.
When looking at the Money Advice Service’s (MAS) benchmark for financial resilience, it’s a target many in their 30s don’t meet. MAS recommends that people should hold an emergency fund of three months’ income to weather potential obstacles, such as unexpected bills, illness, or redundancy. However, the LV= report revealed that 73% of those in their early thirties fall short of having 90 days’ income saved, this compares to the national average of 56%.
Without financial resiliency, life milestones and security are being harmed for those in their early thirties:
- 24% feel worried about the financial impact on life milestones
- 17% put off major life milestones due to a lack of confidence about their finances
- 43% don’t feel confident about handling a personal financial crisis
- 22% don’t know how long they would be able to cope financially if they became unemployed
According to Dr David Lewis, an Associate Fellow of the British Psychological Society, seven in 10 under 35s don’t properly prepare for future risks because they believe their youthfulness will last forever. It’s led to him dubbing the current 4.7 million 30-35-year olds in the UK the ‘Peter Pan Generation’.
Dr Lewis commented, “There are multiple reasons this age group isn’t properly preparing for financial risks. A universal emphasis on the importance of ‘staying young’ means many people are in a state of denial or avoidance when it comes to facing up to the future. We also tend to talk within – rather than across – generation groups, which encourages us to focus inwardly on the present, not the future.”
With people in their thirties likely to be taking significant steps towards milestones where finances are important, bridging the conversation between generation groups could be beneficial. From talking to parents and grandparents to seeking the support of an experienced financial adviser, it could help to identify ways to improve financial resiliency that can be tailored to them.
What steps should you be taking to improve financial resiliency?
If you’re searching for ways to improve your financial resiliency now, there are steps that you can start taking. With a plan of action to move forward with, you’ll be in a better position to achieve the life goals you want, whether that’s to take your first step on the property ladder or become more secure financially as you start a family.
1. Consider the long-term milestones you want to achieve
While there are some common milestones that are on the majority of people’s agenda, there’s no one size fits all approach. That’s why it’s important to consider what you want to achieve in the next five or 10 years. Thinking about whether buying a property, getting married, or having children are things you want, means you’re able to tailor a financial plan to match these goals.
A simple list with realistic time-frames of when you want to achieve each goal by can help you prioritise where your focus should be and the best option financially.
2. Assess existing income and outgoings
Understanding where you’re starting from is crucial for improving financial resiliency. Take the time to assess your current income and outgoings, to work out where you’re making mistakes and could be saving more. It’s a step that’s also important for setting practical dates for when you want to achieve each goal by.
Don’t forget to account for any debt you have too, from an existing mortgage to credit cards. Depending on your long-term goals, paying off debt may help you achieve them or access better rates of lending. For example, reducing debt can improve your chances of securing a mortgage offer with a competitive interest rate.
3. Find a savings plan that maximises what you put in
Your savings will grow with you by simply adding to them alone but choosing the right saving plan that benefits from ‘free cash’ can help speed up your plans. Choosing tax-efficient options, accounts with better interest rates, and government schemes designed to help savers can have a big impact.
The savings plan that is right for you will vary depending on what your long-term goals are. For example, if getting on the property ladder is right at the top of your agenda, a Lifetime ISA (LISA) could be a good option. A LISA is a tax-free wrapper that lets you put in up to £4,000 a year, with a 25% bonus annually to help you build a deposit quicker. While a LISA could work for those working towards securing an early retirement too, a Workplace Pension or an alternative savings account may be a better option and provide more flexibility.
4. Plan for retirement now
With everything else you need to think about, retirement might not even be on your radar yet. However, if you’re looking to improve your financial resiliency now, you should take steps to carry that on once you stop working. The earlier you start, the better for retirement planning. If you qualify, staying part of your Workplace Pension is a good place to start. Currently, employees pay 3% of their salary into their pension, with employers contributing a minimum of 2%, these percentages will rise to 5% and 3% respectively in April 2019.
On top of that, you may also want to consider a Private Pension, LISA account, or using a stocks and shares ISA to further build wealth.
To get a better understanding of the steps you could be taking to improve your financial resiliency, contact us.
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