Are you too young to consider your financial goals?

Financial Planning has gained momentum in recent years but is rarely targeted at the younger age cohort. It’s often viewed as an exercise carried out right before you hit retirement age, to be assured that you can afford to continue living your current lifestyle. Yet the core practices of financial planning are most effective the earlier you begin.

Before I started off my own career in financial planning, I was of the mindset that whatever I earned in my twenties, was merely there just to fund today’s lifestyle and enjoy myself. I believed that ‘setting myself up for the future’ was something I needn’t think about until years down the line. I quickly learned that by adjusting my mentality on my own personal finances, I’d be able to get myself in shape for the future while continuing to enjoy life in the present.

Let’s take a look at a few small adjustments you can make in order to benefit your financial future.

The best investment you can make is in yourself

As someone in the early stages of your career, the biggest asset you have is your human capital. This is the future value of all your combined earnings. The best way to take advantage of this is to invest in yourself. The more time you take now to upskill and work on yourself, the higher your future potential earnings will be. Let’s say for example you are currently age 30 and earning €50,000 a year. If you plan on retiring by age 65 and assume no pay rises, your human capital will be €1,750,000 over the course of your working life. Think about what actions you can take now to improve your future salary and human capital.

You’re never too young to start a pension

When talking about retirement planning or using the dreaded term ‘pension’ around my peers, it consistently manages to get a few eyes rolling. Although it’s hard to picture saving for our future retired selves, making contributions towards a pension early on is an invaluable habit to kickstart. This is even more applicable if your employer is offering matching pension contributions. By starting a pension early in life, you’re benefitting from the following:

1. Income tax relief at marginal or standard rate on your pension contributions.
2. If applicable, matching contributions from your employer (which is essentially free money after all!)
3. Long term investment growth which is tax free. The younger you are, the more time the investment has to grow. As Albert Einstein is reputed to have said “Compound interest is the 8^th wonder of the world”.

Separate your money into individual ‘pots’ for your individual goals.

Using what we call a ‘multi-pot strategy’ can help with visualising and quantifying your progression towards goals. Allow yourself to have a ‘fun money account’ where you know you can draw on this for miscellaneous expenses on activities you’ll enjoy - guilt free. It’s also important to plan for the one-off annual expenses such as car/health insurance, sports subscriptions or Christmas and holidays. Work out how much these expenses are going to cost you monthly and put them into a separate ‘pot’ each month so when they come along, it doesn’t feel like a huge blow to the bank account. I personally find Revolut Vaults brilliant for splitting out these expenses as you can label each ‘pot’ and set up recurring monthly transfers into them.

Always pay yourself first

After working out your monthly outgoings, figure how much you can afford to save each month without sacrificing too much on your current lifestyle. Transfer the remainder into a separate savings account as soon as you get paid. We generally tend to spend what we have and it’s very easy to look at your bank balance the week of payday and want to treat yourself. By transferring this excess to a less accessible account, you are less likely to dip into it throughout the month and go through another month with nothing saved. This is known as Parkinson’s law. The easiest way to ensure you stay on track with these savings is to automate them. If contributions are saved into your various savings accounts by way of direct debit, it reduces the chances that you forget to transfer these funds. It’s recommended to keep at least 3-6 months net income in an emergency cash fund. After this if you’re not saving for anything else, such as a deposit for a house, it would be worth looking at saving into a regular investment account to make sure your money is working for you and tracking ahead of long-term inflation.

Overall, while it is important to plan for the future, it doesn’t mean you have to sacrifice living in the present. A good financial plan is all about striking that balance just right, making sure you get the most from your hard-earned income.

If you would like to explore how we can assist you in planning for the future, please contact me at edaly@invesco.ie or speak to your Invesco consultant.