Building a strong financial foundation – a checklist for young adults

Whether you’re a student, a recent graduate, or a young professional, building a strong financial foundation is essential for your future finances. We’ve put together a financial fitness checklist to guide you on your journey and help you manage your money more effectively.

Bank accounts – current and savings accounts

The first item on your financial fitness checklist is opening a current account and savings account, as this is a fundamental step towards managing your finances. Your current account is for everyday transactions like paying bills and making purchases. A savings account is where you accumulate money for your future goals. Shop around for the best fees and interest rates. Consider some of the disrupter banks, such as Monzo and Starling, as they offer options such as individual savings pots, budgeting, and spending tracking.

Budgeting – your roadmap to financial success

Creating and more importantly, sticking to a budget is a vital financial skill. Budgeting allows you to track your income and expenses, ensuring you are living within your means. Budgeting helps you allocate your financial resources efficiently, save for important goals and avoid unnecessary debt.

Live within your means

Resist the temptation to spend beyond your means or income. Simply put, don’t spend more than you earn. Remember the more you spend, the less remains for saving. Be mindful of the following simple yet powerful statement: Poor people spend, rich people save.

Cultivate a habit of regular saving

Saving regularly, no matter how small the amount, is a vital habit. Setting up an automatic transfer from your current account to a savings account will ensure effortless saving. Try to save a fixed percentage of your salary, that way you’ll automatically save more when your salary increases.

Unlock the power of ISAs and compounding interest

ISAs offer a unique advantage to savers and investors alike. They provide tax-free growth and income on your savings and investments. Consider both cash ISAs which offer tax-free interest, and stocks and shares ISAs, which allow you to invest in the stock market tax-free. Compounding interest means earning interest on interest and is cited as the ‘Eighth Wonder of the World’ by Einstein. It’s an incredibly powerful tool for building long-term wealth.

Pave the way for retirement – start saving early

While retirement may feel distant, starting to save early can have a monumental impact on your future financial security. Research the different available options and decide what is best for you. If your employer offers a pension scheme, consider making contributions as your employer may be obliged to contribute too. This is particularly relevant in the UK, under the automatic pension enrolment scheme, where employers must contribute 3% of earnings.

Rainy day fund

Life is full of unexpected twists and turns. Having a rainy day fund provides a safety net for unexpected expenses. Aim to have around three to six months’ worth of living expenses saved in your emergency fund.

Investing in your future

Once you have an emergency fund and are comfortable with your savings and budgeting, consider investing in the stock market and investment funds. Stock market investments often provide higher returns than interest on savings. However, investing does carry risk as investments can go up or down in value, so it’s essential to do your research before investing.

Understanding tax implications

Having a basic understanding of the tax system and its implications on savings, investments and pensions, is invaluable. The UK has tax-free allowances for interest on savings which are dependent on your income. Try to avoid having investments outside of an ISA as these may be subject to dividend and capital gains tax. Personal contributions to pensions attract tax relief but conversely, tax is payable when pension benefits are withdrawn. This is quite a complex area and using the services of a financial advisor is advisable to gain a clearer picture of pension taxes.

Managing debt

Most of us will at some point have some debt, whether that takes the form of a mortgage, car finance, student loans or credit card debt. Do try to avoid incurring debt on credit cards as this is an extremely expensive form of debt. If you do find yourself with debt, always try and pay off the debt with the highest rate of interest first. Always look at the rate of interest you are receiving on savings against the interest rate you are paying for debt. If you can achieve a higher rate for savings than you are paying on, for example, a fixed-rate mortgage, it is financially prudent to save the money rather than pay extra off on the mortgage.

Conclusion

Building a strong financial foundation early in life and making informed financial decisions will benefit you in years to come. Follow the steps of our financial fitness checklist and remember, it’s never too early to start, and every small step towards financial responsibility counts.

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