Getting into good financial habits when you’re young can really help to set you up for success in the future. Find out how our top five habits could help you hit your money goals.
In your 20s you start to experience a lot of new things; establishing a career, earning your own money, living away from home and being able to make your own decisions. But with that comes new responsibilities – like learning how to manage your own finances.
It can be challenging, but the habits you pick up when you’re young tend to follow you through the rest of your life. So it’s important that you establish good financial habits now, so you can be in a better place with your money later. Here are five habits to get you started.
1. Budgeting is a great financial habit - here's how to set one
Many young people today have a unique set of challenges to face that generations before them didn’t necessarily have. A more competitive job market, student debt, precarious work and rising property prices can all make it hard to become financially stable and stay that way.
Most of these things will be out of your control, so it’s important to focus on what you can do to make the most of your finances - starting with getting on top of a budget.
Budgeting is a really useful tool and sticking to it can mean you live comfortably within your means, and hopefully leave you enough to save for the future. To create one, add up all your income from employment and other sources, then do the same for monthly expenses. Include any debt, all basic living expenses such as rent, travel and food – and don’t forget entertainment too.
Subtract your expenses from your income to see what you have left each month. You can then decide how any extra can be saved. Whether that’s into your pension for your future, or put towards a specific goal you have in mind.
Expenses more than your income? You’ll need to figure out how to cut your spending, or increase your income.
For more ideas on budgeting, try Money Helper’s guide to managing your money.
2. Have clear goals
Once you’ve got into the budgeting habit and understand how much you can save, it can really help to set some clear saving goals and start working towards them.
It’s also a good idea to put some money aside for a rainy day. The pandemic has shown us all just how important it is to prepare for any unexpected expenses. In fact, the Financial Conduct Authority found that in October 2020, over half of those aged 18-24 who had any savings and/or investments had drawn from them to help cover their day-to-day expenses.
If you’re saving towards medium or longer-term goals – like a deposit on a home or a special occasion – a tax-efficient ISA (Individual Savings Account) can be a good way to save without having to tie up your money long term, depending on the type and terms you have.
If you’re saving up for your first home, it’s worth looking into Lifetime ISAs, where you can get a 25% government bonus added on to your savings every tax year if you meet certain criteria.
3. Save into your pension plan
When you’re young, retirement feels like a long way off and there might be other things you’d rather spend your money on. But it’s important to understand the difference that contributing to your pension plan now can make in the long run – even if it’s just a little at a time.
You have the benefit of time on your side when it comes to your pension investments, which means you have more opportunity to ride out market fluctuations and benefit from compounding. Of course, the value of investments isn’t guaranteed and you could get back less than was paid in.
Plus you won’t be the only one contributing to your pension savings - your employer may be paying as well. Some may even offer matching schemes where the more you pay in, the more they will too. And those contributions will even be topped up by HMRC thanks to tax relief – so saving more can cost you even less.
When combined, all of this can really add up over time and could make a big difference to the size of your pension pot by the time you decide to stop working.
There are lots of other benefits of a pension plan – you can read more about them in '7 numbers that explain what's so good about a pension'.
4. Understand the jargon
Understanding how your finances work gives you the best chance of making good decisions about your money. And it can be hard to do that when jargon terms are used.
For example, many people confuse ‘saving’ and ‘investing’. So what’s the difference?
Investments are something you buy or put your money into to try to make a profit in the future, although there’s no guarantee and you could get back less than you invested.
You might not think you’re investing, but if you have a pension plan or a stocks and shares ISA, you are. So it makes sense to understand how it all works.
‘Saving’, on the other hand, is where you put your money into something like a savings account, and you know the rate of interest which will be applied. Your money is generally more secure this way, so you’ll normally get back what you’ve saved plus a little bit of interest on top.
You can read more about the pros and cons of saving and investing here. And take a look at our investment jargon buster where we cut through the confusion on eight commonly used investment terms.
5. Use digital tools to manage your money
For a lot of people today, managing their money can easily be done online and on their phone. So make the most of all the internet has to offer.
It’s full of resources with sites like the Money Helper website offering free and impartial money advice. If you’re time-poor, podcasts are a good way to get financial inspiration while you commute or work out. Or subscribe to email newsletters if you want to get up-to-date savings tips.
You can manage your savings with apps or smart banks too. Some even let you round up transactions you make to the nearest pound and put the extra pennies away for the future, such as topping up your pension plan or ISA.
At Standard Life, we have our own online tools to help you plan for your future. Our pension calculator can help you understand how much money you could have in retirement. Or you can log in or register online, or use our app to manage your pension plan online and on the go.
The information here is based on our understanding in June 2021 and should not be taken as financial advice. The value of investments can go down as well as up and may be worth less than was paid in.