Age 20 to 30
Just started my career
You’re young and you’re broke! At this age a lot of people get into financial stress due to debt. Avoiding consumer debt will mean that you’re not having to use your regular earnings to service the debt plus interest on loan. This may take years to repay and although it may make you look rich to others, it won’t make you wealthy. It is important to understand that if you are spending more than your earnings, it will become almost impossible to be successful financially.
This is the stage where you take your first steps to creating wealth and it is the best time to start saving. Time is on your side and is your ‘best friend’. The younger you are the longer you have to get your money working for you. Understanding the power of compound interest is one of the most useful tools an advisor can show a client.
This chart emphasises the impact of compound interest, and the importance of starting early. Saver Emily, represented by the green line, starts saving £2,000 per year at aged 20 and then stops after 10 years. Saver Dave, represented by the red line, starts saving £2,000 per year at aged 30 and continues saving until he’s 60.
Assuming all their returns are reinvested and they achieve an annual rate of return of 7%, then Emily’s portfolio exceeds £250,000 whereas Dave’s portfolio only reaches £220,000.
The Effects of Compounding interest at a 7% Return
Invested £2000 annually for 10 years starting at age 20
Invested £2000 annually for 30 years starting at age 30
The interest rates provided are for illustration purposes only. The value of investments and any income from them can fall as well as rise. You may not get back the amount originally invested.
Emily only had to invest £22,000 of her savings to get her returns whereas Dave had to invest £62,000 (almost 3 times as much!) and is still less prosperous than Emily.
A critical problem for young people in this situation is cash flow. So analysing your cash flow will help you determine the best way to save any excess income for short term (Emergency Fund) and medium term (Deposit for a house, a dream holiday or school fees).
Since young people are heavily reliant on their income, it is important to insure your income.
If you get ill or injured and are unable to earn an income, this is a major financial risk for someone early in life. The answer to this risk is to get a good income protection policy in place, preferably one that pays a benefit through to age 60 or 65 in case something unforeseen happens.
In addition to this, insure your life against the diagnosis of a critical illness, since the younger the age, the lesser the cost.
You can contact a member of the team here.
Disclaimer: The value of investments and any income from them can fall as well as rise. You may not get back the amount originally invested.