Many people struggle with, or don’t even think about planning for their future. We talked to money coach, Dennis Harhalakis, about why it is important and how young people should approach building long term financial security for themselves.  In this Q&A, he discusses key things to think about, tips on savings, when and how to start saving for a pension, and the tricky issue of balancing enjoyment now with saving for your future.
 
Also, see Dennis’s video on investing, which is another key way of building future wealth.
 

Photo by Suzy Hazelwood at Pexels

First steps

 As a young person, when should you start planning for your future?

Get to a point where you are happy with the current state of your finances, and then think about the longer term. That essentially means:

1. Start by paying off any high interest debt such as credit cards. Compound interest will escalate debt balances, which can cause problems if you make only the minimum monthly payments.
2. Next, build yourself a financial buffer – put some money into an emergency savings fund.

 
These first steps will put you in control and help you feel like you’re moving towards financial independence.
Then you can think about saving for your future.
 

 
Credit cards or a mortgage enable you to spend future earnings now.
Savings, pensions and investments are about taking today’s money to give you a bigger pot in the future, buying you long-term security.
 

How can you build long-term security for yourself?

Understand that building security for the future requires some level of saving and some level of investing. Within that, throughout different stages of your life, you will have different trade-offs to make. For example, if you receive a decent sum of money or a pay rise, do you pay down some of your mortgage, or put it into savings such as an ISA, or top up your pension?
 
There’s no right or wrong answer to these questions. But what they do raise is, what is my thinking process around this? Do I have positive conscious engagement with my finances?  – Do I properly consider what I could do with the money, or do I steer away from anything to do with my finances because it makes me uncomfortable? Do I have people I can talk to? If not, where can I get reliable information? What do I need to know, in order to understand my situation and make a sound decision?
 
There are two basic approaches to saving for the future – one is ISAs and the other is pensions. What they have in common is, the government wants you to save money, so they subsidise people who save.
 
When you put 80p into your pension, the government chips in another 20p. In many cases, your employer will also contribute to your pension. Say you put in 1% of your wages, they may match that with another 1% or even 2-3%. Always take the free money. Of course, in the case of pensions, you can’t take the money out until you reach retirement at 60/65 years old.
 
If you put money into an ISA (Individual Savings Account), whatever you earn on that is tax-free. So, I’d say the way to approach this is always take the tax-free money.
 

Savings

Do you have any tips on savings?

Make saving frictionless. Set up a regular direct debit to transfer money into your savings account or ISA.  Time it for the beginning of the month or just after you have been paid, so you always have the funds available. Saving comes before spending, in the dictionary and also in life. Our spending tends to expand to what we have available, so trying to save what’s left over at the end of the month doesn’t work.
 
It’s not just a question of saving towards a specific thing or event; nowadays we need to save because we live in an uncertain world. It’s really important to build an emergency fund, a financial buffer for those unexpected expenses. The thing is they are always to be expected, but you never know what it’s going to be – whether it’s a problem with the car, the dog, the boiler, or the roof, or maybe you lose your job. And it could be something fun too – like a friend’s wedding or your favourite show. There’s always something! When you’re building an emergency fund, it doesn’t matter what return you get on your money. Don’t worry about the interest rate, just put your savings somewhere safe (don’t put it into cryptocurrency) where you can get instant access.
 
If you are not saving for something specific, and you may or may not need the money, it’s a good idea to put it into an ISA. Then you can access the money, but while it’s tucked away in the ISA it is earning tax-free income for you. Bear in mind Stocks & Shares ISAs will earn more over time than a Cash ISA.
 

Pensions

When & how should you save for a pension?

These decisions relate to what you want your future to look like. The more money you save now, potentially the more money you will have accumulated over time for the future. This is very much a personal decision. I tend to work on the principle that you also need to enjoy the present moment. If you’re in your 20’s or 30s, you should be having a huge amount of fun right now! Obviously, it’s good to save for the future, but the future is 30, 40, 50 years away.
 
Retirement is best seen as giving yourself the ability to work as much, or as little, as you want in later years, as opposed to a target date when you’re going to stop working. Statistically, from a health point of view, the most dangerous years of your life are the year you are born and the year you retire. While people say they can’t wait to retire, work is actually a huge part of our lives and who we are. It validates us, and it pays for certainty and many other things. A lot of people have this concept of retiring early so they can do whatever they want, and that’s fantastic IF they do have strong plans for that.
 
When it comes to building financial security, I’d say generally maximise out all the schemes the government has available for tax free savings. The future is uncertain, so you can try and create certainty around it, but I don’t think that should be at the expense of living from day to day.
 

Spending vs saving

On that note, how should you balance spending now vs saving for the future?

Again, it’s a personal choice. You have to consider what does financial security mean for me? How do I build long-term security, but also enjoy what I’m doing at this moment in time?  There is no hard and fast rule around it, as long as what you are doing is making the future easier, not more difficult for yourself.
 
A lot of people – the FIRE (Financial Independence Retire Early) crowd – will say “you just have to give up your lattes and your avocado toast and then you can retire millionaires”. But it’s really not that simple. It’s not just about deferring everything pleasurable into the future – it’s about weighing up what makes sense for you to do right now.
 
The core of this is to understand your spending. Know where your money goes. You can use an aggregator app e.g. Money Hub or Money Dashboard. As an example, one of my clients realised he was spending £30/week at Subway. Now it’s not a question of whether that’s a good thing or a bad thing. Just be aware of it, and then make a conscious decision around it. For him, it was easy because he wanted to increase his savings. So, he decided to spend £10/week at Subway and save the other £20. Once it was obvious what he was spending, he was able to make that decision.
 
If you end up cutting back everything to zero, you do begin to wonder what it’s all for. So, it’s not about whether you have the avocado toast or the latte, it’s whether you are making a conscious decision around it, or are you ordering one every day because that’s just what you do. Be aware how much that daily habit is costing you, and think whether you would like 10x that amount in 30 years’ time if you saved the money instead.
 
Another way to think about this is by looking at how much of your income goes to the following buckets:

• The Past – paying for things you bought or did in the past g., any debt you have incurred, such as credit card payments
• The Present – funding my current lifestyle g., rent, utilities bills, entertainment etc.
• The Future – accumulating to build future income g., pension contributions, savings, investments

 
This is a handy way of understanding what is going on and where you might need to make changes. While there is no ideal ratio, it’s best to keep The Past at 35% or below. If a high proportion of your income is going to The Past, you will need to reduce spending on The Present to get yourself sorted. If possible, you should aim for 20% in The Future, though this is variable. This approach also means that if you are on track – for example 20 ! 60 ! 20, you can spend the 60% guilt free because everything else is in good shape!
 

Summing up

 
Once you have paid off any high-interest debts, it’s a good idea to start saving for your future.
Start with an easy access emergency fund for unexpected expenses.
Then put away money towards specific projects and to build long term security, through savings accounts, pension, and investments, making sure you maximise the government tax-free schemes, such as ISAs.
However, whilst it’s important to start saving for your future, this shouldn’t be at the expense of your present happiness, nor put you in debt.
The simplest, safest way to build wealth and security is to save or invest a little and often, over the long term.
 
 

About Dennis

Dennis Harhalakis is the Founder of Cambridge Money Coaching.  He helps people transform the way they think about money, in order to reduce the stress around managing their finances. He coaches clients to make better financial decisions and communicate in healthy ways. In recognition of his work, Dennis was recently awarded the 2023 IFW (Institute for Financial Wellbeing Award) for Financial Wellbeing Educator.

To find out more, or to contact Dennis about money coaching:

Cambridge Money Coaching
LinkedIn – Dennis Harhalakis
 

More from Dennis

See more blogs and videos from Dennis on other financial topics and how to build a positive, healthy relationship with money.

Grad Bites: Developing Positive Financial Behaviours
How positive financial behaviours can enable you to stay in control of your finances, to build future wealth & financial security

Grad Bites: Dealing with Debt
Managing money & dealing with debt, including the difference between good & bad debt

Grad Bites: Managing Money when You’re Self-Employed
Tips for self-employed people on managing money, including how to charge for your work 

Grad Bites: Money and Me – Understanding our Relationship with Money
Why people feel overwhelmed by financial matters & how to build a healthy relationship with money

More on Saving for Your Future

When to Save
Once you’re earning a sufficient amount, what should you do with any spare cash? 

How to Start Saving – MoneySavingExpert
Do you want to start saving but don’t know where to start? This guide looks at different savings options to help you decide.

Pensions Basics – MoneyHelper
If you’re just starting to thinking about pensions, read this guide to the different types, pensions vs savings accounts etc.