How To Manage Money - By Financial Times
For many people in their twenties, the dream of a debt-free existence in a comfortable house near their place of work has given way to more modest hopes fora tiny flat in the middle of nowhere, and the occasional meal out with friends.
With interest rates stuck at 0.5 per cent since the financial crisis, bond yields at or around zero and a property ladder that is increasingly out of reach, many young professionals with good intentions and decent salaries find themselves stuck between what feels like an undeserved rock on one side, and a very hard place on the other.
For these savers, putting money away for the future might seem like a hopelessly unrewarding pursuit — especially while they still have student debt to repay. But wealth managers insist that as people live longer and the population ages, young adults need more than ever to plan ahead.
“A few of my friends think taking out a mortgage is completely impossible,” says Lauren Ingram, a 27-year-old public relations executive earning about £30,000 a year.
“I’m unusual for [saving] in my early 20s. It is impossible to see myself as someone who will retire . . . and need to rely on decisions from my 20s”.
After reading a book by Mrs Moneypenny, who writes an advice column for the FT, Ms Ingram swapped her savings accounts to get a better rate and moved back in with her mother to save on London rents.
She is putting money towards a mortgage, and hopes to have enough in the future for other goals such as a wedding, children and a pension.
A recent study by KPMG found that first-time buyers in the UK need a salary of around £41,000 a year — or £77,000 in London — to afford a home.
These figures are likely to rise as supply continues to fall short of growing demand, especially in parts of the country such as London and the south east, where employment is easier to find.
Members of the so-called “Generation Rent”, created by the shortage of affordable housing, can squirrel away savings in anticipation of the chancellor’s newHelp to Buy Isa, which will come into effect from December. The relaxation of planning rules announced by David Cameron last week, which will make it easier for developers to build “starter homes” priced under market value, offers another source of hope.
Borrowing from parents or grandparents to save for a deposit has been a traditional solution to the struggle to build up a mortgage deposit. A more radical solution includes taking out a joint mortgage with friends.
But for most the situation still amounts to a crisis, according to Mark Dampier, head of research at Hargreaves Lansdown. He believes a sudden market adjustment is on the cards. “Save some money, do everything you can and see what happens.”
Of UK couples who married last year, around one-third spent between £5,000 and £10,000 on the wedding, according to research by bridal website confetti.co.uk, with a similar proportion spending between £10,000 and £15,000.
Darius McDermott, managing director of fund research group Chelsea Financial Services, advises the prospective bride and groom to use cash to make the short-term savings necessary for the big day.
“Unfortunately what young savers are faced with now is really low rates, but fortunately inflation is low . . . so if you think you can save without a huge return given where rates are, then cash is probably the best bet,” he says.
Just as for property, the “Bank of Mum and Dad” may also come into play. Ben Walker, 23, and Holly Ward, 23, a PhD student and church worker respectively, decided to get married in April. Ben said he and his bride were fortunate enough to be gifted the cost of the wedding by their parents.
“Most people’s parents do contribute for weddings, I think, though I never expected them to as a protocol,” says Ben. “But I do know couples that wait longer to get married because it is very expensive”.
Few sensible savers opt out of workplace pension schemes without other contingency plans. But for a generation expected to live into their 80s, with or without good health, will a workplace pension be enough?
“If you want to retire in any sort of comfort you need some form of saving in an equity vehicle,” says Mr McDermott, recommending that young savers start with UK stocks to reduce currency risk before later broadening their portfolios.
Patrick Connolly, a financial planner at Chase de Vere, advises young people to put aside 10 per cent of their salary for retirement, on top of workplace pension contributions.
“Pension auto enrolment . . . might provide false comfort for people as minimum contribution levels aren’t enough to give a decent standard of living in retirement,” he says.
He recommends that savers increase their retirement savings to 15 or 20 per cent as they get older, their children leave home and they pay off mortgages.
Mr McDermott and Mr Dampier urge savers to start early, no matter how much they put aside, to benefit fully from the power of compounding.
For some, like 23-year-old Karl Hadwen, a financial services professional with an eye for tech investments, high-risk equity crowdfunding websites such as Crowdcube offer attractive opportunities for young savers.
He says cash Isas are a poor choice while fixed rate bond yields will keep going down, he predicts. “But Crowdcube is a good idea because you can get someone to give you 7 per cent over 5 years,” he says.
Mr Dampier warns that such investments have yet to go through a full economic cycle.
Nick Hungerford, chief executive of online investment manager Nutmeg, recognises the changed landscape for savers, but believes technology can help.
“You see young people interested in career breaks now because they’re pretty much going to have to work until they die,” he says. “[Young savers’] parents and grandparents are used to higher interest, higher returns on the stock market, higher bond yields . . . but we’ve had financial innovation that should power higher returns.”
● Patrick Connolly, Chase de Vere: “While you might only be able to invest a smaller amount initially, you need to actively increase this as you get older, otherwise the effects of inflation mean that in real terms you’ll be investing less and less over time.”
● Mark Dampier, Hargreaves Lansdown: “Just don’t get into debt in a low inflationary environment.”
● Darius McDermott, Chelsea Financial Services: “Whether you use pensions or Isas, begin [the savings] journey early. Even if it’s a moderate amount of money like £50 or £100 a month, get used to saving and you’ll benefit from compounding on what you save.”
● Nick Hungerford, Nutmeg: “With higher job mobility and people not staying in jobs because of redundancies and so on, I think you should have some cash behind you.”
● Lauren Ingram: “I think a lot of people could afford to understand their finances better. And budgets too: don’t eat out every single day. Don’t get tempted by taxis.”
● Karl Hadwen: “If I had the money spare it wouldn’t go towards a house or a pension, it would go towards investing.”