I recently received and email from a reader Mary who asked me a few questions regarding her choice of career and saving for early retirement. As I started drafting a response I was in fact simply reflecting back on things I would have done differently in my early years. I thought that the contents would make quite an interesting post, so here we go…
First a bit of backgound: Mary (22) is working on a graduate scheme at a financial services company. Despite just getting started with her career she’s already planning to retire early. Here’s what she wanted to know…
1) I wanted to ask if you had any advice for young people (I’m 22) on the best thing we can do to ensure we can build up enough passive income to retire at 40?
Well this could be a very long answer so I’ll restrict myself to 5 key points and keep it brief:
1. Have a plan. I see people all around me everyday that don’t have a plan and it pains me to see. You need to plan where that passive income will come from then work back from there. The key way I continually motivate myself is to think of all possible expenditure as forgone NISA income. Once you start doing this you tend to make much better decisions about what to spend your money on.
2. Avoid debt. If you have student debts pay them off asap. Avoid everything else1 at all costs.
3. Fill your ISAs like your life depended on it.For a young person the tax benefits they offer can make a huge difference if your saving/investing in them over the long term.
4. Keep your investments simple. Avoid chasing big wins or multi baggers and instead make solid, sensible investments that will pay out in the long run. You’ve got time on your side so you don’t have to get rich quick by following the latest trends or fads.
5. Treat your personal finances like a business (as described here). That means all the boring things like minimising tax, controlling expenses and maximising your capital to get the best possible returns within your risk tolerance levels.
2) Anything you wish you’d known at a young age?
ISAs can’t be replaced. I knew it but unfortunately I cashed out a few ISAs over the years in order to fund other projects (mainly property) and some travelling. While the property has done well, I regret cashing out the ISA investments as they would be producing some serious income by now.
Patience really is a virtue. I’ve got quite an impatient personality. I tend to get obsessed by things for a short period of time then as my interest wains I divert my obsessiveness to something new. As a result my investment career (which started aged 18) went in fits and starts for several years. Good investments were made (and some lost) but the money tended to always be put to some other use as my interests were distracted. Invest for the long term and stick with it to ensure you get the maximum gains.
It not really that hard. Investing isn’t really that hard. Intimidation is I suspect, one of the main reasons most people get turned off from investing and rely on [expensive] fund managers to look after their nest eggs. If you keep things simple and ensure you fully understand the risks you’re taking and don’t get greedy, you’ll likely match if not beat the returns of most fund managers.
Time flies. So don’t forget to have some fun along the way!
3) Do you think finance is the best career for a young person especially with the current economy (salaries falling, houses rising).
This is a tough one and one that entirely depends on your personality. interests, priorities and of course skills. Also which area of Finance you have chosen will have an impact.
You’ll spend a hell of a lot of your lifetime at work so try and ensure you get the appropriate rewards for giving up that time. These benefits might be your love or passion for the job, however it’s more likely that a big chunk of your motivation to get up every Monday morning will be monetary gain.
Finance jobs typically mean long hours. An average day sees me leave the house at 6.30am and I won’t usually walk back in through the front door until 7.30-8pm. The longer you do it, the more it takes out of you. Make sure you don’t let it take too much.
Try to make sure you get the balance right. As my father said to me the other night while discussing his current retirement and my work life:
Nobody ever died saying they wished they’d spent more time in the office
Quite right too. You don’t see Ermine regretting puling the ‘chute on work a few years early.
If you do stick with finance as a career you’ll likely get a decent financial reward but lose a whole lot of time over the years. My advice would be to make sure that you use the financial rewards to your advantage and buy yourself some time back later in your life.
It’s great to see a 22 year old asking these kind of questions as they set out into the world of work. It also makes me feel incredibly old (btw I’m only mid thirties!) and makes me wonder just how different my life would be if I’d known what I know now when I was 22.
Good Luck Mary!
Notes:
1Don’t be in a rush to load up on mortgage debt until you’re sure that’s what you want and your career/finances/soul can take the burden/risk.
Hello,
Being a 22 year old myself, I really enjoyed this post: great simple advice I would have one argument with it, however, and that is over paying off student loans as quickly as possible. The interest rates on my student loan debts are currently at a rate under inflation, surely it therefore makes sense to delay paying them off as long as possible? I believe this is the case for all students before the 9 grand fee hike. Furthermore, this allows the debt to act as a great inflation hedge for the future. I think the idea of making active contributions – above the 9% taken off your wage at source – is a bit pointless?
Build up a cash fund for emergencies, and also for use as a “Get stuffed!” fund. Interest-bearing current accounts are attractive at the moment.
Beware of cars: they can cost the earth, especially if you buy them new.
Even at 22, it’s probably worth contributing enough to a pension to get you the maximum employer’s contribution. I suggest you contribute no more.
If, on the other hand, you could envisage using both income and capital from age 40 to bridge the gap until you can draw your pension, then you might revisit the matter when you become a higher rate taxpayer. But for a youngster a pension is awfully inflexible even after Osborne’s reforms.
dearieme,
I agree that pensions are terrible inflexible for a young investor and worryingly open to future political interference. That said doing the minimum t get any employer contributions (if applicable) is good advice.
I would be a bit more nuanced on the student debt – any student /graduate loans from banks, absolutely right, pay off as soon as possible. Anything from the Student Loan Company, I’d be less urgent about it as the interest rate is quite low and they won’t send the bailiffs round. I’d rather be putting money somewhere accessible for emergencies than plowing spare money into a debt that you just stop paying if you lose your job.
Use your NISA allowance to the max – easier said than done for a 22 year old to find 15k pa when you also want to go clubbing, vacations, car, own a home etc. Then again the internet has it made it much cheaper to invest compared to my days and there is so much info on FI.
For investments i would keep it simple but the most effective strategy, buy individual UK and USA blue chip dividend growth shares and watch them compound. Perhaps aim to buy 5 shares pa (£3K Each). After 8 years you will have 40 shares. You will be very motivated by tracking the dividend income each share is producing and reinvest to compound. You will get extremely rich slowly. Use FAST graphs to show what a $10,000 investment in Exxon or Shell or Proctor Gamble will generate after a decade – awesome.
Jon,
True, filling NISAs isn’t an easy task for recent graduates. What I was implying was that it’s easy for a low income earner to invest via a taxable account early on (when the tax benefits are minimal/non-existent) and not benefit from the tax breaks of NISAs when their income rises and they may be saving income/capital gains tax. Best to get in the habit and use them early in my opinion.
Good advice regarding investments however I would tend to advise an accumulation income focused ETF might be a better bet to someone starting out in investing. This way no expertise in stock picking is required plus they get the benefit of re-investing dividends.
Thanks for the great post UTMT. Helpful for another young’un (ish). One thing I’d say is that (generally) it’s worth not paying off student loans early. They are usually at very low rate c.1pc. It would probably be better to put that money towards a S&S ISA, especially given that building up investment sums is more difficult at the start of ones career.
Completely agree about not paying off student loans – it’s much less of an issue for UK graduates than it is for, say, graduates in the US. I’m 25, and have an outstanding student loan balance of c. £23k – but I have absolutely no interest in paying off any more than the absolute minimum right now, and I’m fairly sure that will always be the case. Why put my money towards student loans at 1.5% when I could invest and get 6-7% instead?
“If you have student debts pay them off asap.”
For many existing student debtors, this is terrible financial advice. Student debts whose interest rate is index-linked, and which are erased when a certain age is reached should never be repaid faster than is contractually necessary. Martin Lewis discussses this in depth here: http://www.moneysavingexpert.com/students/student-loans-repay
Worth noting that the 9% student loan repayment does not apply to pension contributions made via salary sacrifice. If the company also shares the NI saving, it means a £100 contribution costs around £52 for a basic rate tax payer.
The student loan landscape is complex. For example, there are ‘mortgage style loans’ (quite old, current interest rate something like 3.5%), income dependent loans that came after the mortgage style loans, something like 9% ‘tax’ on salary over £16k or so and a new flavour of income dependent loans for current students that seem to compound at a far faster rate.
For anyone on the 1.5% interest rate, current accounts with bonus rates, mortgage payments or investing are probably a more sensible idea than paying off student debt at present, there are a lot of people on these.
Then again, most students also leave university with an overdraft and credit card debts to boot. These are poisonous and need to be got rid of a.s.a.p.!
Big Pat, Matt, L, Andy, Luke,
You’re all correct in that Student Company Loans debt is cheap and maybe best not ‘over paid’ if risk free investments can outperform the interest rate. I was referring mainly to the plethora of other debt many students take on such as over drafts, bank loans, credit cards which tend to charge much higher rates of interest. An oversight on my part!