As a parent, you work hard to provide for your children, to give them the best possible start in life and help them follow their dreams. But recent research shows why it’s also crucial for young adults to be empowered to take charge of their own financial future.
Keep reading for the latest on the spending and saving habits of 18 to 24-year-olds, plus the one key lesson you should teach your children straight away.
Young people are twice as likely to prioritise gym over savings
According to a new study by credit information company Experian, 60% of 18 to 24-year-olds think getting fit is more important than saving, despite 58% also saying poor financial health is affecting their wellbeing.
In a typical week, only 8% of 18 to 24-year-olds prioritise savings, while 17% prioritise spending their money on the gym, the study found.
Nearly three-quarters of those surveyed (73%) also said information about improving their mental and physical health is more readily accessible than advice about getting their finances in order.
It’s probably fair to say that young adults understand the importance of saving for their future, but most of them put other activities first. There’s proof of just how damaging this approach could be, though, thanks to another recent piece of research.
Pausing pension contributions by just one year “may dent retirement pot by thousands”
A new survey by Standard Life has revealed a year-long break in making pension payments could leave savers nearly £13,000 poorer in retirement.
Someone on a £25,000 salary making the minimum pension contributions from age 22 would have saved £456,893 by the time they reach the current retirement age, research shows.
If that same person paused contributions at age 35 for just one year, though, they’d have £12,764 less in their pension pot by age 68.
Stopping pension payments for two years would reduce retirement funds by £25,335, while a three-year break in payments would leave savers £37,713 poorer.
Standard Life’s calculations use various assumptions around levels of investment growth, salary growth and annual charges. Nevertheless, they highlight in clear terms the knock-on effects of prioritising spending over savings, and that’s an essential lesson for your children to learn.
Say your daughter is preparing to graduate from university. After finishing her degree, she finds full-time employment, starts contributing to a workplace pension, and moves into a house in the suburbs with her partner. Before long, she’s struggling with the realities of daily life, like paying the bills, keeping on top of the mortgage, and maintaining a car.
At 35, she pauses her pension contributions to make her monthly finances feel a little less stretched, because after all, retirement is years away. But without her even realising it, your daughter’s well-meaning decision could cost her tens of thousands of pounds in the long run.
One further thing here – did you know that you could make pension contributions on behalf of your children?
The tax relief on offer gives an immediate tax boost of 20% to the savings and, if your child is a higher- or additional-rate taxpayer, they can claim the additional 20% or 25% tax relief through their own self-assessment.
Helping with pension contributions can be a great way of passing on wealth to the next generation and ensuring your children secure their own financial future.
The power of compound returns – what your children ought to know
It’s obvious that savings are a good idea for long-term financial stability. But the trick to making the most of your money is an unbroken pattern of investment, and here’s why this matters so much for your children.
Continual investment in savings will allow your offspring to unlock the power of compounding. The compound return of an investment is the rate of cumulative growth over a period of time, usually expressed in annual terms. It’s essentially “returns on returns”.
If your child invested £1,000 for a year and received a 4% return, they would end up with £1,040. If they withdrew the interest, and left the £1,000 invested for a second year, they would have another £1,040 at the end of the second year. They would have made a total of £80 in interest.
However, if they had left their £1,040 invested after year one, at the end of year two they would have £1,081.60. They would have made an additional £1.60 “interest on interest”.
Over time, these compound returns can add up to a significant sum. Imagine it’s thousands of pounds generating investment returns in a pension fund over decades and you can see why Albert Einstein apparently called compound returns “the eighth wonder of the world”.
For your children, the lesson is simple: save regularly and you’ll reap the rewards down the line.
Get in touch
As a BlueSKY client we keep your investments under regular review. However, if you want to know more, email firstname.lastname@example.org or call us on 01189 876655.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.