Read time: 5 mins Money management

Saving, retirement and credit – 5 tips for managing money in your early 20s

  • As you become financially independent, money can become more daunting than before
  • Laying the foundations now will help you balance the present and still achieve your goals
  • We look at the importance of planning for your future

It can be a nerve-racking time to be responsible for your money as you become an adult. Managing bills, a car and striving to get onto the property ladder all whilst trying to keep an active social life can be tricky to juggle, but it’s not impossible!

Already in this blog series, we’ve set the foundations that you’ll need in earlier life by advising parents on how to teach their kids and teenagers about money. Now, alas, as you gain more independence as an adult, you’ll also take on more responsibility too.

Get it right, and this is where you could set yourself up for a great financial future…

Cut costs where you can

You’re probably already aware of the many ways you can cut down on living costs each month.

Countless articles (and probably your Mum and Dad) tell you to skip your morning coffee or your avocado-on-toast to achieve your financial goals - but cutting costs doesn’t have to mean missing out on those weekly pick-me-ups.

What’s important, is that you’re aware of where and how you spend your money now, so you can make informed decisions on where and how you choose to spend it in the future.

There are a lot of great apps on the market that will help you with saving, planning and budgeting. Some, including our free app ‘ me&mymoney’, allow you to link all your bank and savings accounts in one app to get a full picture of your finances.

After seeing how much you spend on that morning coffee once or twice a week, you might decide that’s actually a luxury worth keeping and to save elsewhere instead by switching to non-branded products, testing out a weekly shop at a cheaper supermarket like Aldi or Lidl or to start dyeing your own hair rather than going to the salon!

Cut down the costs you decide are unnecessary by keeping yourself in control and informed – just don’t bury your head in the sand!

Saving for a rainy day

You’ll have heard the adage “take care of the pennies and the pounds will take care of themselves”, and this certainly rings true when talking about your financial future. It’s not necessarily about how much you’re putting aside, but it’s more the fact that you are putting something aside each payday, even if it’s a small amount.

As you become financially independent, it becomes your responsibility to safeguard yourself against life’s emergencies. It’s important to build what we call a ‘cash buffer’ or ‘rainy day savings’ to protect yourself in these situations.

You never know when an unexpected expense will come knocking on your door. Whether it’s your car breaking down, a broken boiler or an unexpected bill, it’s better to have a cash buffer to fall back on rather than struggling until your next payday.

There’s a surprising amount of people who don’t have funds readily available for emergencies. A study just last year (2017) found that 40% 1 of the working age population have less than £100 in their bank.

Picture of a wallet being shielded from the rain by an umbrella

Navigating the world of credit

Now the likes of credit cards and overdrafts are available to you, it’s important to learn about how they can be used and what to watch out for. You may have heard that credit is bad, but that may not always be the case.

In a perfect world, no one would need a credit card, however, having a credit card or overdraft can help you build up your credit score.

A credit score is a tool that lenders use to help them decide whether you qualify for a loan or finance agreement like a mortgage or car finance. Your credit score, which is essentially a number, is based on factors such as how many finance or credit agreements you’ve had in the past, how much of your available credit you’re using, how many credit applications you’ve made and even public records like the electoral roll.

The key to successfully managing credit is to always make sure you stay responsible and in control. A credit card shouldn’t be something you rely on each month to make ends meet.

Here are some basic tips if you’re considering getting a credit card:

  • Only borrow what you need. Don’t be tempted to borrow more just because it’s available, companies will often offer you more than you’ve asked for.
  • Stick to 0%, where possible. In some cases, and depending on your credit score, you may be able to get an offer in which you pay 0% interest on the amount you borrow for a limited time. Once this timeframe is up, either pay off your credit card balance, or transfer to another 0% offer with a different provider.
  • Pay it off. Always aim to pay off the balance of your credit card in full, at the end of each month.
  • Leave it at home. If you think you will struggle to avoid the temptation of spending on your credit card, don’t take it out with you. We’ve heard stories of people leaving cards with their family members or even freezing them in a block of ice to make sure usage is kept to a minimum and only when necessary.
Picture of a credit card defrosting in a block of ice

It’s never too early to start planning for your retirement

“I’ve only just started working, why should I think about my retirement?!”

It’s always better to start saving early than to leave it until the last minute, so why should saving for your retirement be any different? It might not be in the forefront of your mind, but it will come around sooner than you think, so you don’t want to be leaving yourself short.

When you pay into a pension like our Self-Invested Personal Pension (SIPP), you get money back from the Government in recognition of the tax you’ve already paid on those earnings.

That’s free money, straight into your pension pot, and you don’t have to make any special arrangements - depending on how much tax you pay and the type of pension you have, your pension company will automatically claim the basic level tax relief of 20%, back from the government for you. However, if you are a higher or additional rate tax payer, you will need to claim your additional tax back from the government yourself.

The sooner you pay into a personal pension the more time your contributions (plus the tax relief) have to build up!

If you’re not sure whether a SIPP is right for you, you can get free financial advice from us. We’ll tell you whether it’s in your best interests to start investing for your retirement or to save cash or pay off debts first!

It’s not only your personal pension savings that will help you plan for your retirement. As of 6th April 2018, all UK employees are automatically enrolled in the Workplace Pension scheme as long as they are aged between 22 and the State Pension age and earn more than £10,000 a year.

Currently, the compulsory minimum matched pension contribution for employers is 2%, this goes up to 3% in April 2019. This means if you contribute 2% of your salary to your pension your employer will match your contribution – it’s essentially free money for your retirement pot!

Some employers will even match above the compulsory level, so make sure you’re aware of the workplace pension contributions your employer offers and make the most of it if you can.

Don’t panic!

If you find yourself scraping the barrel at the end of the month, don’t panic, and try not to turn to a quick-fix like a payday loan.

This is one of the biggest traps to fall into when you’re down on your luck, but in most cases, a pay-day loan will only make things worse and lead to a cycle of lending and penalty fees, no matter how easy and attractive the adverts may make them look!

Managing your money in your early 20s can be a minefield, but if you equip yourself with the right knowledge and stay in control, you should be able to plan for your future without compromising on too much in the present!

If you spend a little too much or end up struggling until payday, don’t beat yourself up, just be sure to get back on track next month.