Forming good habits with money when you’re young can pave the way for a more successful financial future. Here are our top five habits that could help you reach your goals.
Your 20s and 30s are a time where you begin to experience new parts of life; establishing your career, potentially getting engaged or married, starting a family or even buying your first home.
These changes come with new financial challenges, so it’s important to start learning good habits early, which could last a lifetime.
Here are our top five financial habits to get you started.
Budgets – here’s how to set one
As a young adult, you may start to take on new financial responsibilities which you haven’t had to account for before. Not to mention you now also face the challenges of the current rise of fuel, property prices and overall cost of living. Most of these things are out of your control, but a budget is a tool that can help you tackle your spending and feel more confident about your money choices.
Budgeting is basically where you break down your monthly incomings and outgoings to understand whether you’re spending within your means or, if not, where you could be potentially overspending. So where do you begin?
It could be a good idea to try out the 50/30/20 method. This breaks your budget down into three main categories; needs (50%), wants (30%) and savings (20%). The split can be changed monthly depending on where you would rather allocate your money.
You could also record your monthly budget on a digital tool like an Excel spreadsheet, which will make it easy to update regularly.
Or you could try Money Helper’s Budget Planner tool, which breaks your spending down into categories and gives you some tips for improvements. For more help on how to manage your money, try their Beginner's Guide to Managing Your Money.
Set goals and save for them in the right way
You’ll have a lot of different financial goals throughout your life and they’ll change along with your priorities at the time. So have a think about the goals that are important to you now and the ones that might be important to you in the future.
Then, once you’ve got your budget, you can be clear about how much money you can realistically afford to set aside each month to put towards these goals.
Having a mixture of short, medium and long-term goals will help you stay motivated. Make sure your goals are clear and realistic. This way you can easily track your success and celebrate any milestones along the way.
If you’re saving for a medium-to-long-term goal, such as buying a car or covering a wedding, there are some great ways to manage and save your money. For example, you could put your money into an Individual Savings Account (ISA). It’s a tax-efficient way to save your money and you can access it whenever you need to.
Or a Lifetime ISA is a great example of a savings account to help you save for your first home. You can put in up to £4,000 in a tax year and you’ll get a 25% government bonus added on top if you meet certain criteria – meaning you could get up to an extra £1,000 each year.
Plus, a Lifetime ISA doesn’t allow you to access your savings without penalties until you come to buy your first home. So it’s a good way to make sure you don’t dip into them.
Invest in your future
It’s a good idea to start thinking about how you could grow your money over time – investing can help you do this. When you invest your money, you’re essentially buying a piece of something you’re hoping will eventually be worth more than you bought it for. And if it grows in value then you’d get back more than you paid in – of course, this isn’t guaranteed.
The amount you’ll get back will depend on how your investments perform, the amount you put in, how long you leave them invested for and the charges you pay. And don’t forget that investing is for the long term (generally 10 years or more), so when you’re young you have the advantage of having lots of time ahead of you to ride out market fluctuations.
You can find out more about investing in our investments basics guide.
If you’re not happy taking much risk with your money, there are lower-risk investment options available. You also might decide cash saving is a better option for you. This would mean putting your money into something like your bank’s savings account, a Cash ISA or a building society account. Your money isn’t likely to grow very much with this option, but it also won’t be affected by market trends. We explore the pros and cons of both saving and investing in Saving vs investing – and how to make the most of your money.
Understand why your pension matters
Although saving into your pension plan may not be at the top of your financial priorities, it’s a good idea to consider how much you’re paying in and get a good understanding of how your pension works when you’re young. Your future self may thank you.
When you know how your pension works, you’ll also understand how to make the most of all the benefits it has to offer, which could boost your savings over time.
First thing to know is you’re probably not the only contributor to your workplace pension plan – your employer pays in too. Some employers even agree to match the payments you put in up to a certain percentage.
Another benefit of your pension plan is the tax benefits you get on your payments. Ultimately, saving more into your pension plan can cost you less than you may think. You can find out more about this in our article.
It’s also important to know that your pension savings are invested. So, like we mentioned before, they have the chance to grow over time. And you could achieve growth, not only on the money invested, but also on any growth you’ve already achieved. This method of growth-on-growth is called compounding. Remember the value of investments can go down as well as up and you may get back less than was paid in.
Want to know more about your pension plan? Try our pension basics guide.
The amount you can pay into your pension ultimately depends on your financial position, which is likely to change throughout your life. So it’s worth regularly reviewing your payments. If you have a Standard Life pension plan, you can review your payments online or on our app.
Talk about it
A bad habit many people get themselves into is keeping quiet when it comes to money or to feel discomfort, shame or embarrassment around the topic. But talking about money is a great financial habit to start.
There’s so much confusing financial jargon out there. And it often means you’ll struggle to make important and informed decisions. So it’s good to have an open dialogue when it comes to money. Ask questions, talk to your friends and family about their experiences and learn new ways to manage your money in the best way for you.
Money & Pension Service suggests people who talk about money make better and less risky financial decisions, have stronger personal relationships, help their children form good lifetime money habits and feel less stressed or anxious and more in control.
You can find out more about why it’s important to talk about money, and some practical steps you can take in our recent article.
The information here is based on our understanding in November 2022 and shouldn’t be regarded as financial advice.
Laws and tax rules may change in the future and your own personal circumstances, including where you live in the UK, will have an impact on tax.