Young people should get into the habit of saving now, because who knows what the future welfare state will look like

It is an obvious point but one worth making that people without savings are at the mercy of the political climate 20, 30, or 40 years hence

Hamish McRae
Saturday 06 October 2018 15:36
If people don’t have the habit of saving when they are young they are unlikely to acquire it
If people don’t have the habit of saving when they are young they are unlikely to acquire it

Half of all 22 to 29-year-olds in the UK have no savings at all.

That is the stunning (and alarming) figure from a new survey by the Office for National Statistics. It is stunning because the country has not only seen a record number of jobs, but also has the highest labour participation rate and lowest unemployment since the 1970s. And it is alarming because the evidence is that if people don’t have the habit of saving when they are young, they are unlikely to acquire it.

It is an obvious point but one worth making that people without savings are at the mercy of the political climate 20, 30, or 40 years hence. It is possible that the present safety net of our social welfare system may be better then but it is equally possible that it may also be worse.

While this is a British-focused story, much the same is happening in America. While one in six millennials have more than $100,000 saved, about half have nothing at all. In continental Europe, the overall savings rates are generally somewhat higher than in the UK or the US but they have to be, for the demographic trends are more adverse.

European societies are, so-to-speak, getting older faster than most of the English-speaking world, so they will need to save more.

Set this against another story: Extreme saving. Young people saving half or more of their income, has become, if not a new fashion, at least a more publicised form of behaviour. There are not only stories here, but also in the US, in Australia and elsewhere in the world. The idea is very simple: anyone with even modest earnings can manage to save a considerable proportion of their income, and as a result be able to retire, if they so choose, in their 40s. To anyone who claims that they cannot save, the answer is that they have already been shown the way to do so.

Australians have taken this further with the “buy nothing new month” campaign, which was launched back in 2010. Of course you need to buy your food and pay your utility bills. You also have to pay your taxes. But you don’t buy any stuff you don’t need, and I suppose if you get into the habit of not wasting money for one month, maybe you carry on those habits into other months too. By the way, Australians chose October for the buy nothing month, so if you decide to adopt it, you have already missed the first week.

For people who reject personal austerity on this scale, there is another path. It involves saving of course, but the focus is less on how you save and more on how you invest.

Unsurprisingly technology has been pressed into action, with apps and robo advisers there to help. Companies like Wealthify, which was one of the first of these online investment platforms, offers a range of portfolios, including ethical ones, where people can drip-feed money into them. It is not the place here to offer specific investment advice – my own feeling is that people should simply spread their risk, try and invest largely in equities, and watch the fees they pay because these mount up – but clearly there is not much point keeping saved cash in the bank at present interest rates.

There is another twist – the tax advantages of saving in a pension are truly compelling, particularly when the employer matches contributions, and that wonderful thing called compound interest enables a modest pot of money to be built into a sizable one if you wait long enough. But it needs to be a sizable pot, if it is to fund even a half-decent pension. No one can possibly know what annuity rates will be in another 30 years time. But as a guide, most charitable endowments (at least most well-run ones) take about 3 per cent, maybe a little more, out of their pot each year if they do not want to run down the real value of the endowment.

That leads to my final point. Many young people feel, for obvious reasons, that they will never be able to own a home, never be able to set aside enough to retire on, never be able to aspire to the lifestyles of the rich and famous that they see flaunted every day in the media. It is an “us” vs “them” view of the world and it is deeply corrosive of society.

One thing is for sure: For those people who do not save in their 20s and 30s, even a modest version of this rather unpleasant vision of prosperity will be way out of reach. But for regular savers, helped by apps that do the maths, a reasonable level of financial security is open to all. How to get that message over to the people who do not have an embedded savings habit is another matter.

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