Wealth-building for the future

Creating a solid financial foundation is crucial, regardless of your age or career stage. However, it can be particularly challenging for young professionals who are just starting out. You might be making more money than you have ever made in your life, but at the same time, you suddenly find yourself having to pay for things that you have never been responsible for. What’s more, you are probably juggling a number of financial goals – from thinking about continuing your education to buying a home and even starting a family. Where do you begin?

This week, Wealth Manager Tom Fleming takes a look at various wealth-building strategies suitable for individuals at all stages of their careers, but especially for young people who are just beginning their professional lives. Consider sharing this guidance with your children to help them establish a strong financial foundation early on.

Saving nowadays could not be simpler. If you want a reminder of the various apps out there that can incentivise you to put away money on a regular basis, have a look at our article on Budgeting and Saving Secrets.

Building up your wealth also means keeping on to as much of what you earn as you can. First of all, set your sights on the low-hanging fruit and consider opening an ISA. These come in various hues. If you are aged between 18 and 39, then you can deposit up to £4,000 a year in a Lifetime ISA (LISA) and use it towards a first home costing up to £450,000. The state will add a bonus of up to £1,000 a year on top of what you save.

You could also open a Stocks & Shares ISA: you don’t have to be on Wall Street to invest your money – you can start investing from your kitchen while having a cup of tea. These give you the potential to earn more on your savings than a cash ISA, but the value of investments can go down as well as up. So – you should be prepared to invest for at least five years. Currently, the ISA limit is £20,000 for the current tax year. And crucially, you will not have to pay UK income tax or capital gains tax on any money you earn from your investment.

The next best place for surplus savings could be your pension. Most people can contribute up to £60,000 each tax year, and you can take advantage of unused pension allowances from up to three previous tax years.

Pension tax relief is one advantage that ordinary investments do not have. Whenever you pay into your pension, the government refunds the tax you paid on this part of your income. This amounts to a boost on every pension contribution – so every 80p you pay into your pension instantly becomes £1. And if you are a higher- or additional-rate taxpayer, you can claim even more tax relief (through your self-assessment).

It is virtually impossible to incentivise people to start saving early without referencing Einstein’s famous quotation about compound interest being the eighth wonder of the world. But let’s consider the maths underpinning it. If someone were to offer you the choice between an immediate cash payment of £1 million or a one-penny payment that doubled every day for 30 days, you would actually be well advised to take the second option. Your one penny would have increased to over £5 million in value. But the magic only really starts to happen in the later years, since the compounding is being applied to increasingly large numbers. Even on day 20, your penny is only worth just over £5,000.

So, if you are telling yourself that you will put aside money for tomorrow “when you can afford to do so”, or “when you start making enough”, you are putting yourself at a huge disadvantage. It might not be the Temple of Artemis or the Hanging Gardens of Babylon, but compounding is pretty amazing. Regardless of how much you make, the sooner you get started, the more effectively the eighth wonder of the world will start working for you – and a penny saved today could mean millions in retirement.

Historically, times such as these have been good times to invest: the dot-com bubble, the Global Financial Crisis and even – to a degree – Covid. There are always people savvy enough to leverage periods of volatility and use them as a springboard towards their own financial freedom.

The Consumer Prices Index rose by 7.3% in the 12 months to June 2023. So despite last week’s good news, inflation is still nearly four times higher than the Bank of England’s target rate. Inflation is eating away at your purchasing power, and people on fixed incomes, consumers, savers, and those planning for retirement will all be hurt by it. According to the Bank of England’s inflation calculator, goods and services costing £100 in 2020 now cost just shy of £121.

By not investing, you are likely losing money right now. In short, many would say that you cannot afford not to invest. If you are in your 20s or your 30s, you really are young enough to ride out this period of volatility.

An app on your phone can definitely help you squirrel away your loose change and get you into the habit of saving. It can even help you build and balance an investment portfolio based on your age and your attitude to risk. What it cannot do, however, is help you balance competing goals, deal with the financial impacts of changing jobs or redundancy, or help you navigate a path through too-good-to-be-true investment opportunities. Even if you are just starting out in your professional life, it is not too soon to seek out the advice of a professional adviser – someone who can help you invest and take charge of your money.

At IQ, we only recommend a certain investment strategy once we have got to know you. There are lots of things to consider – such as your earning potential, your health, your plans to buy house or even start a family. These are all factors that will be weighed up carefully in our conversations with you.

The true value of a high-level financial planner is in what they do in addition to providing financial advice. It lies in helping clients to answer questions about how much they need to save, and the tax obligations of various investment strategies. None of this can be replaced by an algorithm.