Financial freedom for Gen Y

For many millennials, your twenties and thirties are a time to find your way and build the foundations for future success. This should include having solid financial foundations in place. By following these simple steps, you can start to unlock your financial freedom.

Stop living month-to-month

When you are starting out in your career, finances can be tight. You must control your finances as early as possible and not live from month to month.

One way to start focusing on your monthly finances is to look over your bank statement from last month and see where you actually spent your money, considering whether any of the purchases you made were essential. Doing this for a few months lets you quickly identify where you can save on your monthly expenditures. The most common areas for reductions are eating out, takeaways, and unused gym memberships.

An excellent way to look at the monthly budget is to consider the 50/30/20 rule, where 50% of your income is spent on essentials such as rent, utilities, and transport, and the next 30% is spent on flexible desired costs such as phone bills, food, clothing, going out and then the final 20% should be used for saving and debt repayments.

It can take a while to reach the desired position of saving 20% of your monthly income, but it is a good rule of thumb and an excellent habit to develop. If you are not yet able to save 20% of your income, challenge yourself to find ways to reduce your other spending so that you can save more.

Repay your debt

If you have unsecured debt, repaying it as quickly as possible should be your number one priority. Debt is expensive and can weigh down your financial strategy for the future.

Make sure you have assessed how you are repaying your debt. Have you considered all the finance options? If you have a balance on your credit card, for example, you can do a balance transfer to a 0% credit card and look to overpay the minimum payment each month, allowing you to eat into the debt faster. The quicker you repay debt, the more you will have available to put towards your savings.

Build an emergency fund.

As a rule of thumb, everyone should have at least three months’ income saved. Ideally, the cushion would be up to six months’ expenditure for unexpected costs that come with life’s unpredictability. The best place to house these emergency funds is in an account that provides you with instant access. Make sure you have also shopped around to get the best interest rate possible.

Take care of the basics for your family.

In addition to considering what savings and investments you can make, you must ensure that you have sufficient financial provisions for your family should the unexpected happen.

It is very important to make sure that you have sufficient life cover to repay debts such as mortgages, personal loans, and credit cards. Life insurance when you are young is relatively inexpensive, and by taking it out now, you can make savings over the longer term.

Also, consider what would happen to the family finances if you could not work for a prolonged period. Do you have sufficient provision for this eventuality, or would you be best paying for insurance to cover this?

Save for your retirement.

Although retirement may seem like an eternity away, it is essential to start saving for your retirement as early as possible. Under auto-enrolment, all employers must now provide employees access to a pension arrangement and contribute towards it, so you will automatically become a pension scheme member. Contribute what you can do and find out from your employer whether they will increase the amount they will contribute if you pay more. Employer pension contributions are extra money for you, so make sure you get the most out of your employer’s offers.

Diversify your investment

If you have an emergency fund and have money left over each month, you can invest this to achieve your medium—to long-term goals. It is important to note that if your goal is to use this capital within the next 3-5 years, then investing is not likely to be appropriate, and you should be saving in cash.

If you are investing, then make sure that you have a diversified portfolio. The easiest way to do this when you are starting out on your investing journey is to invest using funds. They will aid with reducing your risk, and when the market drops, as it inevitably will do, you are more likely to minimise your losses if you have a diversified portfolio.

Costs can also have a big impact on investment performance, so make sure you consider these in any investments you make. Investment funds can range from as low as 0.25% per annum for passive funds to over 2% for actively managed funds, so it is important to make sure that the costs will not impact investment performance too much.

Don’t take undue risk, don’t follow the herd.

You will undoubtedly hear your peers discuss the latest hot investments, such as cryptocurrencies. Don’t get drawn into risks with your money that you are uncomfortable with. Only invest in things you understand and provide a broad, diversified portfolio. With technology, investing in many things is easy, mainly through crowdfunding sites. However, most of these investments are very high risk and should only form a small percentage (if any!) of an investment portfolio.

Work with a financial planner.

Finally, as you travel on your financial journey, you will inevitably benefit from the knowledge and expertise that a financial planner can bring. The earlier you engage with a financial planning professional, the greater the benefit to your finances. They can ensure you have a coherent and robust financial plan to achieve your goals and ambitions over your lifetime.