The last year has highlighted the importance of financial security. Younger generations have been hit hard by the pandemic, so passing on your knowledge to children and grandchildren could be invaluable.
Some 29 million adults don’t feel comfortable talking about money and 48% admit regularly worrying about finances, according to the Money and Pension Service. So, by starting a conversation you can help your children and grandchildren create a more secure future.
The advice doesn’t have to be complicated – the best kind is often the most simple. Just a basic understanding of how to manage their money, deal with debt, and save for the future should be enough to put them on a sound footing.
To help you start that conversation, here are ten key financial tips you should pass on to the next generation.
1. The importance of a rainy day fund
Often referred to as “rainy day money” this is a sum set aside for emergencies and unexpected events. Ideally, this should be around three-months’ net salary. So, if the worst happens, they know they’ll be able to cover their immediate costs. It can provide a financial safety net for loved ones if something unexpected happens.
2. The impact of compounding interest
Albert Einstein reportedly described compounding interest as the “eighth wonder of the world”. He said: “He who understands it, earns it. He who doesn’t, pays it.”
Today, it’s often not realistic to avoid paying it totally, but an appreciation of the impact of interest – both positive and negative – helps foster financial understanding and better decision making.
Compounding means the longer it takes to pay off a loan, the more interest is paid. The table below shows the amount it will cost to repay a loan of £20,000 over different terms with an 8% interest rate.
|Term of loan (years)||Monthly repayment||Amount repaid|
The monthly repayment over a longer period is lower, but the amount you repay is substantially more.
The positive side of compounding is that the longer you save or invest, the more your money will grow. You’ll see an example of that in the next section.
3. Start saving into a pension as soon as possible
Bearing in mind the abovementioned concept of compound interest, children and grandchildren should try to start saving money for retirement as soon as they can. They may think it sounds boring to start saving when they’re in their twenties, with retirement potentially forty years away, but this money will significantly appreciate over the years.
The table below shows the value of a pension at age 65 following monthly contributions of £100 starting at different ages. We have assumed an annual growth rate of 4% gross, and that no charges have been deducted.
|Starting age||Total contributions||Value at age 65|
As you can see, a delay of just five years (£6,000 contributions) can make a difference of over four times that amount thanks to the compounding effect.
4. Increase pension payments each year, even by a small amount
Once loved ones have got into the habit of saving into a pension, the next thing to do is to try to increase the amount saved every year. Even if it’s by just the rate of inflation.
If they’re paying a percentage of their income each month into their employer’s scheme, their contributions will increase every time their salary does.
To illustrate the value of even small annual increases, we’ve taken the example from the table above and factored in annual increases of 2.5%. All other criteria are the same.
|Starting age||Value at age 65 (level)||Value at age 65 (2.5% annual increase)|
5. Overpay on loans and credit cards where possible
Advise your children and grandchildren to pay over the monthly minimum repayment on credit cards, where they can. Interest rates on them are eye-wateringly high, and the longer the debt sits there, the more it’ll grow, and the longer it’ll take to pay off.
If they have a lot of money on credit cards, using any lump sums they receive, such as gifts or work bonuses, will reduce the outstanding debt and could mean paying less overall. They should focus on paying off the card with the highest interest rate first, then move on to the next.
6. Use tax incentives for both pensions and savings
The government provides financial incentives for individuals to save for their retirement and save money generally.
For every £80 saved in a pension, the government will add another £20 tax relief. That’s 25% growth, before investment returns. Pension savers don’t have to do anything to claim it – the pension provider will take care of that. Higher- and additional-rate taxpayers can claim even more tax relief.
For regular savings, loved ones can save up to £20,000 each year into an Individual Savings Account (ISA) and not pay tax on interest or investment returns.
If they are saving to buy their first property, they should also consider using a Lifetime ISA (LISA). They are tax-efficient like a standard ISA, but the government will also add a 25% bonus to contributions. Up to £4,000 can be added to a LISA each tax year, providing a £1,000 bonus when the maximum is deposited. To apply for a LISA, individuals must be aged between 18 and 40. Be aware that there is a penalty if the saver withdraws money from a LISA before they are 60 for any reason other than buying their first home.
Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.
7. Use standing orders or direct debits to earmark savings
Rather than allowing your children or grandchildren to naively think, “Oh, I’ll just save whatever’s left in the bank at the end of each month”, encourage them to set up standing orders or direct debits that take savings out of the bank as soon as their salary goes in. This can help your loved ones to prioritise saving, and start building nest eggs for certain goals.
8. Keep records and check statements
Getting into the habit of checking bank statements regularly can help younger generations manage their budget and ensure they’re on track. Online banking has made it easier than ever to go through transactions regularly.
This habit will help them spot any discrepancies such as overcollection, and deal with them before they have a serious impact on their finances. It can also help identity overspending.
9. Shop around for insurance
It’s important to always keep an eye on insurance renewal statements. It’s often assumed that the insurance provider will be offering a competitive rate to renew. However, searching for a new deal and switching providers could help loved ones reduce outgoings, providing extra money to add to a pension or ISA.
10. Seek financial advice when it’s needed
We know that financial advice can help families take control of their finances and reach their goals. But this step can be overlooked by younger generations when organising their finances. Whether they need ongoing advice or one-off support, seeking a financial adviser when they have questions or concerns can ensure they receive tailored advice that’s right for them and their goals.
If you know someone that could benefit from our services, please pass along our contact details.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.