When you’re in your 20s and 30s, finances are often not a priority. It can be tempting to spend your entire paycheque in order to live life to the full. However, make the right financial moves at this age, and you could potentially set yourself up for life. Here’s a look at three simple moves that could make a big difference to your wealth over time.
Paying yourself first
Saving money is always a smart thing to do, no matter your age, and the easiest way to do this is to pay yourself first. As soon as you receive your paycheque, skim a little bit off the top (aim for 10%+ if you can) and redirect this money into a savings or investment account.
If, like most people, you wait until the end of the month to save money, the chances are you won’t have much left. You’ll have already spent your money over the course of the month because it was sitting in your bank account, just waiting to be spent.
However, if you pay yourself first and move a proportion of your income into a separate savings or investment account, it removes the temptation to spend the money. You can then spend the rest guilt-free. Get into the habit of paying yourself first while you’re still young and it will do wonders for your wealth over time.
Contributing towards your pension
When you’re in your 20s or 30s, putting money into a pension (retirement) account may seem like a strange idea. Retirement could be 40 years away, so why think about it now? The reason it’s a good idea is to do with compounding (earning interest on your interest). When money is compounded, it grows exponentially over time. The longer you leave it to compound, the more it grows.
So, for example, if you have £10,000 now and earn a return of 8% per year on this money, you’ll earn £800 in the first year, taking the total investment to £10,800. However, earn 8% on your money for 40 years and you won’t simply earn £32,000 (40 years x £800) interest – instead your total interest will be closer to £207,000. Your original investment of £10,000 will have grown to around £217,000. That’s the power of compounding for you.
The sooner you start paying into a pension, the better, as it will give you more time to take advantage of the power of compounding.
Investing in shares
Finally, investing in shares while you’re still young is another move that can set you up for life. The reason for this is that, over the long term, shares tend to generate much higher returns than savings accounts, meaning they can really help you build up your wealth.
While shares can be volatile in the short term, over the long run, the asset class tends to produce returns of around 6-10% per year. That’s far higher than the interest rates offered on savings accounts. Stick £10,000 in a cash savings account earning 1% per year and in 10 years, you’ll have just over £11,000. However, earn 10% per year on your money for 10 years and it will grow to nearly £26,000. That’s a big difference.
Ultimately, building your wealth up like this early on through shares could have a huge impact on your life.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019