Seven financial ages of man
To reach the milestones most of us want to hit takes careful planning. Chiara Cavaglieri offers tips on how to succeed
We Britons are an ambitious lot, wanting to achieve all of our key life goals in just 20 years, from getting our first job at 18 to reaching the peak of our careers by age 39, according to a new Aviva report, Times of our Lives.
The study, which charts the goals, worries and wealth of adults aged 18 to 65-plus in the UK reveals the ideal ages we pick to meet major milestones and while they may be optimistic, how can you better your chances of success and what are the financial implications if you do get everything you want?
Age 18: Get first job
A first job is often special, but a first pay check is even more so and while it may be tempting to splurge, even saving a token amount is worthwhile. Living at home is prime time for early savings and avoiding debt so steer clear of store cards and credit cards. Even modest amounts build up nicely over time so this is about getting into the saving habit. “Budgeting is the key to financial security and good habits started at 18 when you first get a job will build firm foundations,” says Danny Cox, from independent financial adviser (IFA) Hargreaves Lansdown who recommends operating two accounts, a current account for day to day use and a Cash ISA for savings. If you pay yourself first so that your monthly savings leave your current account on or shortly after pay day this reduces the risk of running out of the money by the end of the month and not having anything left to save.
Age 20: Buy a car and start saving or investing
Young drivers living at home may well be tempted to take out a big car loan and buy something flash but David Gibson from IFA Gibson Financial Planning urges caution. “ Unfortunately, I speak from experience. I wish I’d saved that few hundred a month instead. The difference in starting saving at 20 rather than 25/30 is remarkable. Those extra few years make all the difference,” he says. If you do buy a car, start with a small engine and take a Pass Plus course as insurers may offer discounts on your insurance premiums. You could also try specialist providers such as Insure the Box and Young Marmalade which offer black box technology. At such a young age it makes sense to focus on saving rather than investing but there are reasons to develop an investment portfolio, for example, you may be lucky enough to have too much cash, interest rates may be particularly low, or your cash savings could be eroded by high inflation. If you are going to dip your toe in the investment world, it is worth remembering that equities have outperformed cash and gilts 99 per cent of the time in any given 20 year period. “Each individual is different and some can’t stomach the rocky ride of the riskier investment portfolio, but taking good advice from a financial planner can, literally, reap dividends in later years,” says Mr Gibson.
Age 21: Move into your own home and start a pension
You may aspire to rent your own flat, but Kusal Ariyawansa from IFA Appleton Gerrard Private Wealth Management says paying a landlord and getting a loan is a waste of time at that age. “The reason many people struggle is due to the strains of expectations versus reality. Should you really move out of your parents’ home at 21 unless they insist? Why not pay them rent instead?” he says. “If you do what others do, you’ll probably end up where they are … so why not think outside the box?” budgeting carefully is even more important and if you want to be financially independent it’s crucial to create a safety net to cover any unforeseen events. Advisers suggest putting aside an emergency fund of around six months’ worth of expenditure. As a twentysomething you can expect to pay into a pension for at least 40years – as things stand the state pensionwon’t be paid until age 68. Over such a long period, this is the ideal opportunityto take on more investment risk using high-growth areas such as emerging markets to aim for the best possible returns over the long term. If you have the opportunity to join a company pension scheme, do so and you could benefit from matched employer contributions. Auto enrolment intoacompany pension scheme begins in October 2012 and will apply to employees aged 22 or over.
Age 25: Buy a car and start saving or investing
The adults in Aviva’s poll may believe that 25 is the ideal age to buy a first home but it is unlikely for many in the current market as the national average first time buyer is aged 29. The biggest hurdle is the deposit but the larger this is, the better the termsyou can secure on your mortgage. Opt for a repayment mortgage, rather than interest-only, so that you are paying off the capital. Those that can afford to will do well to get on the ladder as early as possible but don’t rely on future increases in property prices to repay your mortgage – it’s crucial that repayments are affordable even if interest rates were to rise.
Age 27: Get married
Aside from the cost of some weddings, asamarried, or committed, couple the biggest threat to financial security is theloss of earning power. Insurance can provide cover if you or your partner were to die, or be not able to work due to accident or illness. Unmarried couples have no rights in law so you also need to draw up a will, says Mr Cox. Your employer may also offer benefits such as death in service or salary replacement insurance, so always check your entitlements.
Age 29: Have first child
Having a child isn’t simply about wanting a family – it must also be a financial decision as the cost of raising children until their 21st birthday stands at a colossal £218,000, according to a recent survey by insurer LV=. Childcare and university fees are the big ones but with the introduction of Junior ISA’s last year, you can start building up a tax-free nest egg for them, with family and friends allowed to pay into it, up to £3,600 per year. There is also Government help for families. Visit turn2us.org.uk to see which benefits you are entitled to.
Age 39: Career peak
At this age, you need to get to grips with your tax position to make the most out of tax breaks. The under- 65s pay income tax at 20 per cent from £8,105, 40 per cent at £42,475 and 50 per cent when earning £150,000. At £50,000 child benefit will decrease so financial planning around these thresholds can make a big difference. “If saving for a pension, people should focus on their income patterns as well as their age,” says Jason Witcombe from IFA Evolve. “If someone earns, say, £35,000 now but with a promotion might be earning £45,000 in a couple of years they should consider holding off on extra pension contributions until their income goes up.”
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