I grew up in a household where I was encouraged to save for the things that I needed. Of course, at the time that meant saving my pocket money to buy some new bangles or flared jeans and jelly shoes from Tammy Girl, but the lessons were still the same;
These lessons helped me get through college and university without any student debt, loans or credit cards. They helped me save for a deposit to buy my first property and have served me well in many areas of my life since.
Today’s younger generations are growing up in a different world where new outfits, items or experiences are just a click away. Online companies actively encourage impulse spending and have introduced even more dangerous ways of facilitating the habit through features such as ‘buy now and pay later’; quick checkouts where payment will be taken at a future date (digital versions of payday loans); and paying monthly or weekly instalments.
This isn’t just for the modern equivalent of jelly shoes from Tammy Girl, these instant purchases that are removed from fiscal responsibility include bigger ticket items such as cars being bought on hire purchase contracts. Whilst this has its place, it lulls the more impetuous to commit to buying the newest, shiniest model without asking important questions such as ‘how much interest am I paying without even owning my car?’ or ‘what if I can’t afford the monthly repayments?’.
Gen-Z (those born after 2000) are quickly becoming ‘Generation Buy Now Pay Later’ and with very little financial education within the schooling system they could be spending their way to disaster. Many of our clients are concerned about this very topic for their children so we thought we would highlight some areas for discussion:
GOALS, GOALS, GOALS!
Encourage setting a savings goal or savings target. This might be for a house purchase, a year of travelling, a ski season in France… Whatever it is, save for it and start now! Little and often is a much more comfortable way to save than hoarding every penny as the deadline looms.
Most banks offer the ability to create ‘spaces’ within your accounts. These spaces allow you to ringfence money for goals such as travel. However, it is only saving if you actually save it… transferring it back whilst in the queue at Zara doesn’t count!
To avoid this trap there are less liquid savings vehicles, which will allow you access in the event of an emergency, but generally carry a penalty or time delay in getting the money to you to avoid these impulse purchases. Term accounts or Cash ISAs are good examples of this; with Lifetime ISAs a great long-term savings vehicle for that first house purchase,especially with the 25% government bonus of up to £1,000 per annum.
Credit ratings are based on your ability to handle debt responsibly so total avoidance is not the best course of action. Instead, lower the limits on credit cards to a manageable amount, possibly an amount that could be paid off in full within two months, or even better, in one month if affordable. Always pay more than the minimum payment and ALWAYS pay on time!
For larger ‘secured’ debt research is key. Car purchases for example should involve research of all the options available and consider how funding the repayments would be impacted if there was loss of earnings due to sickness. For example, that new Audi might seem like an attractive deal but if you lose your job you might end up losing your car as well.
The largest purchase your children or grandchildren are likely to make is a property. When purchasing property keeping the levels of existing debt and monthly fixed direct debits as low as possible will maximise how much can be borrowed.
Keeping an eye on their Credit Rating is a good starting point, with various apps they can download that will give them handy tips to improve their score and allow them to monitor current deals.
Make pension contributions!
The earlier your children and grandchildren begin saving into a pension plan the longer it will be invested and therefore the longer it has to grow.
To put that into context, let’s look at an example whereby Maurice saves £160 per month into a Junior Pension for his granddaughter Molly from birth until her 10th birthday, and Carly saves £160 per month into her own workplace pension between the ages of 20 and 30. Tax relief tops these contributions up to £200 per month.
If we assume that both pensions were to grow at 5% per annum until age 60, Molly’s pension could be worth £346,165 whilst Carly’s pension would be valued at £130,466.
Junior Pensions have been introduced to help get saving for retirement started as early as possible. This is a great way to gift wealth to your family and help build a bright future for them financially.
Save the increases!
As your children or younger generations gain employment, most will experience promotion and salary increases throughout their careers. Encourage them to save some of their salary increases.
By not elevating our spending to match higher income we can allocate more of our money to savings. For most, the workplace pension would be a good starting point. An estimated £2 billion is lost each year due to employees not taking advantage of Employer’s matching pension contributions.
Not all employers offer this and the long-term nature of pensions might make this less attractive so an alternative might be a traditional Stocks & Shares ISA.
As a family focused firm, it is important to meet the families of our clients and to help educate younger generations about finance and investing. This is vital for succession planning and gifting to work effectively.
The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.
Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.
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The Financial Conduct Authority does not regulate some forms of tax advice.
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