I was asked by a client to give financial advice to her daughter. She is still in college and has a part time job. She has accumulated a decent amount of money for her age and they want me to talk to her on what she should do with the money.
Lots of living ahead of you
Advising a 20 year old college student on what to do with her money isn’t as simple as you would think. At that age, putting money into a pension will benefit from 40 years of compounding. With 6% return, you can expect your money to quadruple in value in real terms after inflation is taken into account. That is a lot of heavy lifting done.
But at 20 years of age, there is a lot of living to do. You are an adult but you only have a part time job, you haven’t really started your working life. But in saying that, the bank of mum and dad is beginning to close its doors. They will be expecting you to cover some expenses, such as going out and your summer holiday. You may want to get your own car and have to insure it (never cheap for someone in their 20s).
Lots of people travel after college to see the world. That isn’t cheap. Who is going to fund that if your money is in a pension that you cannot access for 40 years?
Then there is the property market. We still have a culture of owning your own home and it is not easy to get on the property ladder in Ireland, you need to have a decent deposit, with a lot of people also requiring help from their parents.
Structure
What advice would I give to a 20 year old starting out? The first thing is to live beneath your means and save the rest. You will have inconsistent wages if still working part time but each week always save some of what you earn. Make it a habit and automate it if you can.
Don’t go into credit card debt to fund your lifestyle, if you can’t afford it, save up for it.
If you do use a credit card, make sure you at least meet the minimum payments (you should really pay it off in full) as unpaid bills will crop up on your credit statement and it may impact on your ability to get a loan in the future.
Capital markets
Use capital markets to grow your money. Don’t do all the heavy lifting yourself. Investing in the markets means investing in the largest and most successful companies in the world. Having even the tiniest ownership in these companies can help your money grow without you having to do anything.
But remember, this is for long term saving as the markets can be volatile in the short term. Don’t put money into the markets with the expectations that they will pay for this summers holiday. You may end up not be able to go anywhere if you take that short term a view to investing.
If you create a habit of saving from the outset, you will do ok.
By Steven Barrett of Bluewater Financial Planning.
