I read a pretty interesting article recently on USA Today. It is estimated that millenials will need between $1.8 and $2.5 million dollars(around £1.3 to £1.7 million) to generate the equivalent of a $40,000 annual income in today’s dollar once they retire. That is just shy of £30,000 a year, so nothing crazy. If you are among the oldest millenials, and currently in your mid 30s, and have nothing saved so far, that means you need so save around £1,500 a month for the next 32 years. Younger millenials, in their mid 20s, need to save around £750 for the next 48 years.
If you are just getting started, with your first entry level job, that seems impossible. How can you possibly save over half of your income, each and every month? The good news is, you have time and compound interest on your side. Your salary will gradually increase, and your savings should increase accordingly. However, the best way to prepare for a comfortable retirement is to start today. Too many people have the YOLO mentality, thinking you have to live for today, and if you don’t make much anyway, saving £10 or £20 a week is pointless. Wrong. Little amounts add up. £20 today can turn into £100 by retirement age, if you plan carefully.
The first step is to look into a pension plan. There are plenty around, but if your company has a specific match offer, that is where you should look first. My old company used to match our contributions up to £200 a month. That means if you invest £200, you get an instant 100% return on your investment, as the company puts in an extra £200.
You can also invest in tax free vehicles, such as a stock and shares ISA. The setup is really easy, you can open one online and try to fully fund it every tax year. Once the money is in your ISA, all the dividends are tax free. But if you withdraw money from your ISA, you can’t put it back. So you need to plan carefully, so you have short term savings to cover large expenses that may occur.
How do you find more money in your budget? First, you need to look at your expenses. Where is your money going? Sometimes, you just swipe your card out of boredom, convenience, or lack of a better option. I used to go out a lot for example. Until I decided to invite my friends at home. Everyone brought a dish or a drink, and we had just as much fun. Now, we rotate house, and only go out on special occasions. It didn’t affect our social life, it just improved our budget.
The same applies to all areas of spending. Over the past few years, I have reduced my utilities and broadband bill by using comparison sites and switching providers. I have cancelled subscriptions from magazines I was no longer reading. I have taken my shoes and used clothes to mend and repair, giving my favourite outfits a few more years of life instead of throwing them away. I have drastically reduced food waste, looking at the food I was repeatedly throwing away, and avoiding buying more.
Again, all these little lifestyle tweaks won’t affect your well-being, since it is pretty much money wasted. So take a look around. Do you really NEED to buy this or that? Can you do with a haircut every 6 weeks instead of every month? Can you bring your lunch to work once a week? Just get started with one area of your life.
I often advise people to start with the biggest expense they have, which is usually housing. Refinancing your mortgage for a deal 0.5% cheaper will save you thousands of pounds over the life of the loan. The same goes for 0% balance transfer credit cards. The next big expense is generally transportation. Can you have a no car day once a week? Can you group errands so you save on petrol? Can you cycle to work? Third come regular bills and expenses such as food and hygiene. You do need to eat, but are you careful with your spending? Some websites will suggest delicious recipes if you input what’s in your fridge. It will save you a trip to the stores and avoid waste.
All those little tricks will save you £5 or £10 here and there, and before you know it, you will have much more breathing room in your budget to contribute to retirement. Just give it a try, how much can you save? What is your best saving tip for people who are just getting started?
For more tips on how to save and invest more, check out Standard Life Savings’ Little Guide to Financial Admin for more money saving tips.