How many times have you said to yourself “If I knew then what I know now”? This happens in all walks of life, and we are guessing finances aren’t the exception; a legacy is about so much more than the wealth you pass on, the real value comes from what you pass on during your lifetime (and we don’t just mean handouts from the ‘Bank of Mum and Dad’). Making sure your loved ones are engaged with their finances early on is incredibly important, and we have some top planning tips to pass on to the next generation to help start those conversations.
While most of us may want to press fast forward to 2021, this year has given us time to pause, reflect, and appreciate the real value of life. It’s unfortunately also had a financial impact for many, and 68% of millennials have had their income reduced during the pandemic.
Financial literacy in the UK
Since 2014 financial literacy has been part of the UK curriculum. But only 4 in 10 children and young people say they’ve had some financial education at school.
With these low levels of financial education, it is no surprise that the ‘Bank of Mum and Dad’ has been in demand. However, although this might fix a problem in the short term, the long-term goal should be to become financially secure on their own.
As a parent, you will always be there for your children, but through support and education, preparing them for financial independence is the best gift to pass on.
The main savings milestones for the next generation
- Emergency Fund
First things first, we recommend people of any age make sure they have enough money set aside for those unexpected emergencies. So when those unexpected bills land on the doorstep, they don’t need to put it on a credit card or ring you for some help.
- Getting on the property ladder
In recent news, Boris Johnson announced his plans to turn ‘generation rent’ into ‘generation buy’, encouraging long-term fixed-rate mortgages with a 5% deposit. And, this teamed with the recent reduction to stamp duty will hopefully mean that getting on the property ladder is more obtainable for the younger generation.
However, even with these incentives, cobbling together a deposit is no mean feat. Our first suggestion would be that you point them in the direction of a Lifetime ISA, which provides a 25% bonus, paid by the government, on up to £4,000 of savings each year. An extra £1,000 per year could make a big difference.
The key to a secure future is to save, save and save some more. A useful tip is to follow the 50-30-20 rule; the idea being they should spend 50% of their income on needs, such as living expenses, essential travel, bills and mortgage/rent. 30% should go on wants, such as meals out, shopping, trips, and subscriptions. And 20% should go to on savings and debt, either paying off debt or putting money in an investment, savings account, or pension.
And obviously the earlier that 20% starts going into savings, the longer it has to grow and build for their future. So, with a little bit of discipline and awareness now, the future will look a lot more secure.
Five top planning tips to pass on to the next generation
Here are our 5 top tips to help the next generation achieve their immediate needs and future aspirations:
1. Get organised
It’s time to gather all the facts and figures together; they need to understand where they are today to know what’s possible for the future.
It’s important they have a handle what comes in and what goes out again because a budget is the key to any good financial plan.
Talking about finances or even looking into them can be difficult but laying it all out on the table is truly the best place to start.
2. Set goals
It can be easy to say what we want to achieve from life, but the only way we can start working towards these goals is if we build a step-by-step plan.
Perhaps making goal-setting a yearly exercise could help. Writing a list of what they would like to achieve, how they’re going to do it and when they want to do it by, will help them relate their finances to their aspirations.
3. Save little and often
Whether they have plans to buy a car or to go on an expensive holiday, get them thinking about how much they will need and encourage them to break this down into manageable steps and start saving earlier. Read our previous blog here for ideas on how to develop the ultimate savings strategy.
Make sure they understand the benefits of saving into an Individual Savings Account (ISA) or LISA as we mentioned before, and if you’ve had experience investing, perhaps share some tips and tricks you’ve learnt along the way, and point them in the right direction of where to start.
4. Focus on the future
Surveys show that 40% of people aged 18-34 stopped or reduced pension contributions during the lockdown, but do they know the consequences this could have on the future value of their pension?
Opting out of a Workplace Pension not only stunts the growth of a pension, but it also means they’ll be missing out on valuable tax-free cash from their employer. So, make sure they are thinking about their retirement, and the earlier they do, the better.
5. Money talks
Everyone has a unique journey with money, and with your own experiences comes lots of lessons learned.
Take time out to reflect on your own experiences with money and then share your top tips with your family, hopefully, this way they can also learn from your lessons, as well as learning their own. The other advantage of this is that you’re making it commonplace to discuss something that is an unnecessary taboo, which could have a positive impact on their relationship with money.
And, of course, you could help them by recommending a financial adviser when the time is right.
Our sister company, Neon Financial Planning, is primarily designed for people in their 30’s and 40’s with successful careers or who have set up their own business. It’s a unique digital financial planning service, with all planning, coaching and advice delivered online. The fixed-fee and light service model makes Neon refreshingly affordable. If you think your loved ones would be interested, they can get a taster with a free basic financial plan.