Things look pretty gloomy for younger people who are juggling rent, food and fuel bills, with inflation gobbling up a monthly pay packet pretty quickly. But in a climate of feeble interest rates and the move to future self-reliance clear when it comes to pensions, there are some steps it is worth considering — even if you can’t tackle them all at once.
1 Save for a flat with government freebies
Anyone who is in their twenties and saving for a flat should investigate the Lifetime Isa. You can pay in up to £4,000 a year into this savings account and the government will top it up with a bonus of 25 per cent. So a wave of a Treasury money wand can turn £4,000 into £5,000. Nice.
You can choose a cash flavour or a stocks and shares one. As much as I’m an advocate of investing, if you want to buy a flat in three or four years, I think the stock market is too risky and I would stay with cash. Not factoring in inflation, you could still make returns of 25 per cent in cash (the government bonus) so this is a rare example of when cash can work hard for you.
If that flat is a longer term dream — five years or more — I would investigate stocks and shares. Setting up a monthly direct debit is a good way to save, because you will smooth out the price at which you buy shares.
Moneybox or Nutmeg are good platforms for novice investors to gain access to the stock market, while AJ Bell and Hargreaves Lansdown offer more choice but require greater knowhow.
Warning: if you change your mind and want to take the money out and not buy a first property there are penalties — so do read the terms and conditions.
2 Don’t be greedy — be boring and diversify
It’s easy to roll the dice when you have tiny sums today and need seemingly huge sums tomorrow. I was in my 20s at the time of the dotcom bubble back in 2000, and investing in tech companies was my equivalent of crypto. I lost money but I learnt to be cautious about backing things I didn’t really understand.
It’s still possible to back future trends but against a backdrop of more sensible boring things. A good discipline for most is to put at least 80 per cent of your savings into mainstream, seemingly dull investments. Anyone can get a ”mixed bag” of global investments (called a multi-asset fund) which someone else manages for you and will cost about 0.25 per cent a year for the investments alone. Take a look at Vanguard LifeStrategy range or BlackRock MyMap.
After allocating 80 per cent of your money to this “boring” option, you can back more thematic options with the rest. The more you diversify the better. So, for example, is a blockchain fund a smarter bet than buying crypto? If you’re a medic, maybe a pharma fund? An eco warrior could look to a clean energy fund (although beware the green bubble of hype).
A key benefit of a fund, instead of a single stock or currency, is that you minimise the risk of something going horribly wrong.
Also be aware of how much trading costs can impact you if you are adding regular small amounts. Many advocate exchange traded funds (ETFs). These can be great vehicles, but are bought and sold like shares, usually carrying a £10 transaction fee, so they don’t typically work for people starting out their investing life. Why? £10 out of a £500 investment means you’re down by 2 per cent before you’ve even blinked and added stamp duty on share transactions.
3 Start a pension
I’m going to buck the trend here and not suggest that most twenty-somethings pay large sums into a pension. I don’t live in La-La-Land and I understand the more immediate needs.
However, although I don’t think most people can amass meaningful pension savings in their twenties, everybody can acquire a pension savings habit. If the only thing you do in your twenties is set one up and get used to the idea, these are great foundations for the future.
Assuming average returns of 5 per cent after fees, £100 invested at the age of 25 would be nearer £735 when you are 65. And that’s without all the government top-ups which boost this even further. It really is financially compelling, just as long as you can set it aside for such a long time.
There are some easy choices which let you start by contributing as little as an initial sum of £50 to £100. If you want the easiest route imaginable, and can stump up £50, then Wealthify has a digital service and will set up and fully manage a pension for you for about 0.76 per cent, all-in, every year.
Alternatives are AJ Bell’s Dodl which will offer a little more choice, requires a minimum of £100 and will charge an admin fee of 0.15 per cent a year, and you’ll pay for investments on top.
Or PensionBee also makes it pretty simple, has fair charges and works on the basis that it sweeps up all your old pensions under one digital roof, making it easier to stay on top of everything.
So there you have it. Take the government top-ups for any property savings. Avoid flashy, ultra-risky investments. And get the pension habit, even if you can’t get the pensions savings.
Holly Mackay is founder and chief executive of Boring Money, a financial website for consumers.