Young people face a unique set of challenges and opportunities when it comes to managing their money. With the rise of online financial tools and social media “finfluencers”, understanding the fundamentals of saving and investing has never been more crucial. We talked to financial journalist IONA BAIN about the subjects most affecting young savers and investors. From the importance of long-term goals and saving for the future, all the way to navigating the ups and downs of the stock market.
TEBI: Why do young people need to think about saving and investing?
Iona Bain: It’s crucial that all young people have some money in an easy access savings account – or as I like to call it, a “yikes!” fund. The way that I describe savings is that, when you put your money in a savings account, it’s still your money. It’s just put at one side so you can access it when you really need it and want it. It’s easier, cheaper, and far less stressful than maxing out a credit card or dipping into your overdraft.
Having some money in an easy access account really can be the difference between struggling and pulling through. It’s also the best financial strategy for those shorter-term goals – i.e. the ones that you think will be attainable within five years. That’s because savings are usually protected under the Financial Services Compensation Scheme and they can be accessed either instantly or at a predetermined time.
Now, I don’t really have a hard and fast rule about how much to save into a yikes fund. Usually three months worth of income is recommended, but if you can save more, great! And if you can’t save that much: don’t worry, because I really do believe that anything is better than nothing.
TEBI: Understandably, the focus for many young people will be their more immediate financial concerns. What would you say to someone who thinks it’s too early for them to be thinking about long-term savings or a pension, for example?
IB: Young people need to take care of their short-term financial needs, of course, but they also need to think about the big picture. That means saving for their retirement as thoroughly as possible. Now, most of us don’t want to work forever – I certainly don’t.
So the idea behind a pension is that you can save into it throughout your working life and build up enough money to, one day, step back. You can give up work, or at least reduce your hours, and go and do something else with your life.
I call it a future fund, rather than a pension, because I think that sums up this pot of money far better than the word pension. The future fund is created by the magic of the stock market – when you save into a pension, you’re putting your money into stocks, shares, and other assets. The longer you can be invested in those assets, the more potential there is to build up a bigger future fund. That’s why I recommend young people start saving for their retirement as soon as possible. More time in the stock market gives your money more time to grow, and also to enjoy the benefit of compound interest, where your returns are earning their own returns. It’s like a snowball that just keeps getting bigger and bigger over time.
TEBI: So, for young investors looking to take that first step: where can they start?
IB: Young people can find an easy route into investing through something called drip feeding. As the name suggests, this involves you investing relatively small sums – say, £100 or £200 every month. This is done automatically, usually as a direct debit, and it’s not only a really convenient and easy way to invest; it can also be a good way to reduce your risks. That’s because stock markets are inherently volatile. So, if you were to invest a big lump sum in one go, you run the risk of your money suffering a much bigger fall in value if markets were to crash compared to if you spaced out that investment over 12 months. Regular investing increases the chances of you buying assets at a lower price when markets fall, so you’re cushioning your portfolio from the biggest losses.
Now, the downside is that you might also miss out on the biggest returns should markets suddenly rise. But I think beginner investors shouldn’t worry too much about that. For them, it’s about setting up that solid investing routine and managing risks. Drip feeding is a great way to achieve both those things.
TEBI: What kind of decisions will they need to make to align their investing actions with their overall goals?
IB:A big question that young people need to ask themselves is: how much they should invest in equities (i.e. company shares) vs. other types of assets. Now, there are no hard and fast rules here. It depends on what your goals are, how long you intend to invest, and what your appetite for risk is. If you are investing for a very long time – at least ten years – and you’re comfortable taking a higher level of risk; you can afford to max out on equities with as much as 80 or 90 per cent of your portfolio put into company shares. To be honest, most young people should be comfortable taking that kind of risk because they’re going to have far more time to invest in the stock market than older people. And – as we know – the longer you can invest, the more risk you can take. Having said that, it’s vital that you diversify your portfolio and that you’re not overly exposed to one sector or region. You also need to understand the risk profile of any funds, ETFs, or individual companies you’re invested in. Do your homework before you invest.
TEBI: Of course, for young investors new to the markets, the prospect of experiencing a market downturn will be especially daunting. What advice would you give for weathering the inevitable ups and downs?
IB: Market downturns can be really unnerving for young people. When you are new to the stock market and you see your portfolio losing lots of money – even if it’s just on paper – that can trigger lots of really negative emotions. You may feel that urge to do something – anything – to protect your money. But usually the best thing to do is nothing.
The market doesn’t ring a bell when it hits a top and it’s usually very difficult, if not impossible, to anticipate when markets are about to fall and sell out just in time. So you need to accept that downturns are inevitable and remember that the stock market is like a rollercoaster: it goes down but it go back up at some point.
Young people are, or at least should be, investing for the long-term. So they shouldn’t get too hung up about markets falling in the here and now. They will have enough time to ride things out. Part of being a successful investor is about understanding how your brain reacts in these difficult situations. It’s about learning how to override certain harmful instincts. It’s as much about that as it is about grasping the numbers. We need to accept that we’re only human, so we’re going to react in a very human way when scary things happen in the stock market. We need to accept that our natural responses need to be actively countered with a cool, rational mindset – and obviously some firm principles.
TEBI: Finally: there’s a lot of social media content targeted towards a young demographic that promises all manner of “investing tips” and “get rich quick schemes”. What impact do these have on the investing landscape for young people?
IB: There was been a real explosion in individual share trading during the pandemic and it was being partly driven by young people who are new to investing. They’re stuck at home, they’re bored, and they’re going online and they’re seeing all these really attractive opportunities to get into investing and, as they see it, make lots of money in a short space of time.
They’re also being enabled by this new generation of trading apps that are low cost and youth friendly. They make investing affordable and easy – maybe too easy – so we’re seeing lots of young people diving into the deep end. They’re buying individual shares that they think are a one-way bet, but they’re actually potentially very high risk. They could end up losing a lot of money. So I think these young people are gambling and speculating rather than investing and, of course, it’s good to take some calculated informed risks. That’s part and parcel of investing, but investing is not a game. If you want a chance to really grow your money, to fulfil goals and make a real impact, then you’ve got to have a proper investment strategy and to do your homework, and to be well diversified. Basically, act like a cool customer and not as an adrenaline junkie seeking out the next get-rich-quick stock.
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