Millennials – defined as those born between 1981 and 1996 – will live for longer than any previous generation. They need to start saving now to pay for their long retirements. However, spare cash isn’t all that easy to find if you graduated during the 2008 financial crisis, find yourself racked with student debt and face a steep climb to the first rung of the property ladder.
Millennials may have faced some obstacles, however there are some ways in which those who began their careers during the financial crisis can optimise their financial resources.
Start saving today, and not in cash
It’s easy to think that stashing away £50 per month in a cash savings account will alleviate your financial concerns. What you may not realise, is that when low interest rates are combined with high inflation, the purchasing power of your savings will fall every year. The base rate in the UK is currently 0.75%, while inflation is 2.3%. The interest that your bank pays you every month is not sufficient to counter the eroding effects of inflation and over time, your purchasing power will suffer. Unless these negative real interest rates change, a cash deposit account will not help you realise your retirement dreams.
Compounding means that any interest, yield or capital gains generated remain invested, instead of being spent. Individually, these additions may seem small, but when combined over a long time period, they create far greater growth than would have been possible from the original investment alone.
If you were to invest £50 today and leave it in an account which returned 6% per year for 20 years, you would find yourself with £160 in 20 years’ time. Not bad for doing nothing. That number would increase enormously if you paid in an extra £50 every year – at 6% over 20 years, you would end up with a staggering £1,950 – significantly higher than the 20 lots of £50 you paid in over that time (£1,000). Compounding alone would have generated an additional £950, almost doubling your original investment.
The question is: which vehicle do I use to capitalise on these potential returns?
Take advantage of tax wrappers
Tax wrappers are a good place to start. ‘Wrappers’ mean that any money you invest will not be liable for income tax or capital gains tax, greatly boosting your long-term returns. Most readers will have heard of an Individual Savings Account, or ISA, one of the most popular tax wrappers.