Finances can seem complex and challenging but when you’re first starting out in your career and planning for the future, it’s easy to miss something. Helping the next generation find their feet in the world of investing, savings, pensions and more can be a huge benefit to them.
Whilst financial education is improving in schools, it’s still often failing to equip students with all the skills they need. According to the Money Advice Service, just 40% of young people say they learned to manage money as part of this education. The organisation added there are ‘big gaps’ on money knowledge among those entering adulthood.
So, what key financial lessons can you pass on to the next generation?
1. How to budget
We all know that we should budget, but it’s something that can often slip through the net when you first move out and start setting up a home of your own. It’s one of the basic financial lessons that can help young adults start to manage their finances. Knowing how to balance the books from a young age can help ensure they live within their means. It’s never been easier to keep track of where the money is going either, thanks to a range of tech-savvy apps designed to improve budgeting.
2. The essentials to consider when using credit
At some point, children or grandchildren will likely need to take on some form of debt, perhaps to purchase a car or a mortgage when stepping on the property ladder. However, whilst credit facilities can undoubtedly be useful, it does come with risks. Helping the next generation to understand where debt should be used, the impact of interest rates and the risk of only making minimum payments can put them on the right track to using credit cards, loans and overdrafts responsibly.
3. Why building an emergency fund is important
When you’re younger you often have an ‘it won’t happen to me’ mindset that means you’re more likely to focus on the present. But it’s just as important that 20 and 30-somethings create a financial safety net too. Ideally, an emergency fund should cover three to six months of expenses. It can seem like a huge target when young adults are just starting out, but it’s one that can be worked towards gradually and will improve their financial wellbeing.
4. The benefits of saving into a pension
Auto-enrolment has gone some way to improving how many young people are saving for their retirement. But it’s still important to explain the benefits of saving into a pension. The combination of employer contributions, tax relief, and investment returns over the long term mean pensions are typically the most effective way to save for retirement. When you’re young and have conflicting priorities, it can be tempting to halt pension contributions in favour of these, however, the benefits should be kept in mind when deciding.
5. The impact of inflation on savings
Savings are often viewed as the safe way to hold money, and whilst this is true in some respects the impact of inflation is often overlooked. With low-interest rates, it’s likely the value of cash assets are slowly losing value in real terms. As a result, it’s important to get the most out of savings. This may mean searching for the highest interest rates possible and using accounts that lock savings away for a defined period. The Annual Savings Allowance means most people won’t have to pay tax on income earned from saving, but if the allowance will be exceeded, an ISA (Individual Savings Account) should be considered.
6. When to start investing
Cash assets may be preferred if you’re worried about financial security and potential investment risk. Speaking to the next generation about when investing is appropriate can help them grow their wealth in the long term. Once they have an emergency fund built up and start looking at saving goals more than five years away, it may be time for them to look at investing as a way to beat inflation.
7. It’s ok to ask for help
Often, we don’t talk about money, even if we’re worried or confused about something. However, to improve financial literacy, it’s important that young adults are encouraged to ask for help when they need it. This may be coming to you with a question or seeking support from a financial adviser as their finances become more complex.
Please note: Workplace Pensions (Auto-Enrolment) are regulated by the Pensions Regulator.