Our 20s are a time of exploration, learning, and change. It’s a decade where we make some core decisions and can lay the foundation for our futures. But with this independence comes the challenge of managing our finances, a daunting task for most of us.
They don’t teach you how Income Tax and pensions work in the classroom, and living off grants or student loans is a whole different ballpark from managing our money as an adult in full-time work with rent, bills and debts to think about.
Our 20s are also the decade in which most of us prepare to buy our first home, so it’s crucial to get a grip on budgeting and saving if you’re still living with Mum and Dad.
In this guide, we’ll help you navigate three essential elements of financial success – saving for your first home, getting started with investing, and not neglecting your retirement savings.
1. Buying your first home
The sooner you start saving, the better
Do you have enough money to be saving up right now, or is it more reasonable to wait until you’re more financially secure? Property prices are eye-wateringly high. According to Halifax, the average house price for first-time buyers in 2023 was £288,136. It’s also over £132,000 more expensive, on average, than it was ten years ago!1
With the average first-time buyer’s deposit now as high as £53,4142, if you do decide to start saving up, you’ll likely need to set aside a significant amount of money.
This is where simple, everyday cost-cutting measures can make the world of difference to how much money you can afford to put away. Start by gaining a clear understanding of your spending patterns. Budgeting apps like Plum can help you track expenses, highlight areas for potential savings, and set achievable goals. Even small adjustments – such as cutting back on discretionary spending or cancelling unused subscriptions on your phone – can add up over time.
To make saving easier, automate the process by setting up a direct debit into a dedicated savings account. This “set it and forget it” approach ensures you prioritise saving without being tempted to spend the money elsewhere. The challenger banks are good at making this easy to manage. Don’t just leave the money in a current account with a poor interest rate. Shop around for the best deal at the time.
Consider a Lifetime ISA for a deposit boost
The often-overlooked Lifetime ISA (LISA) is designed especially to help give first-time buyers a leg-up with their savings.
If you’re aged between 18 and 39, LISAs offer a tax-free way to save – but with an appealing extra. You can save up to £4,000 a year and get a free 25% top-up from the government, i.e. a bonus of up to £1,000 every year!
There are penalties if you need to take the money for something other than a property (or retirement) so do read up on the Ts and Cs and make sure it’s right for you. However if you are sure that buying a flat is on the cards, these can be a great option to get that deposit a lot faster.
2. Buying your first home
How much can you afford to invest?
Starting an investment account can often be done with small sums such as £50, so it is easy to start small and take that first step.
Before you jump in, building an emergency fund should typically come before investing, as this provides a safety net for unexpected expenses such as car repairs. Most financial advisers will suggest we build up a cash buffer of at least three months’ income. Interest rates are pretty high now so make sure you find a top-paying savings account for this.
When you have the funds to start your investment journey, remember that it’s a long-term commitment, and you should ideally have a timeframe of at least 5 years for these savings. Investing little and often can be sensible as it rides out the ups and the downs of the stock market so consider setting up a monthly direct debit.
As with most things this is about setting up good habits. Even putting relatively small amounts such as £50 into an investment account each month can form a brilliant foundation for later life.
Focus on keeping things simple
Ready-made portfolios
If you’re new to investing, ready-made portfolios are a low-effort option for those who would rather leave the number-crunching to the experts. Many investment platforms offer pre-designed portfolios tailored to different risk levels or objectives. Don’t necessarily be afraid of ‘risk’. This is used as another word for volatility but if you have time on your side, volatility can actually be a positive and potentially lead to higher returns in the long run, even if the road is a little bumpier. These portfolios are managed by professionals, which means you can benefit from expert oversight without the need for extensive market research. While ready-made portfolios typically come with management fees, they’re often lower than those charged by traditional financial advisers and can offer an easy entry point for those who want simplicity and professional input.
ISAs
If you’re new to investing, it’s generally a no-brainer that you should be using an ISA (Individual Savings Account) to minimise the impact of tax on your investment returns. ISAs act as a tax-efficient wrapper, shielding your money from Income Tax, dividend tax, and Capital Gains Tax. This ensures that every pound you earn from investments held within an ISA stays in your pocket, allowing your wealth to grow faster over time.
ISAs are also simple to manage, as there’s no need to report them on your tax return, reducing stress and paperwork. If you’re starting out with investing, ISAs offer an accessible, hassle-free way to protect and grow your money while avoiding unnecessary tax obligations as your investments grow.
3. Building your pension pot
Make the most of your workplace pension
Although we have different priorities in our 20s, it is true that the more you save into a pension in early life, the faster your retirement savings will grow. This is because of ‘compounding’ – the financial equivalent of building a snowman. You start small and it seems to take ages but the bigger it gets, the quicker it grows!
The pension you get through work is worth investigating and understanding. Most of us will have a pension at work which we will pay into, along with our employer. Have a look at how much you have invested here, and see which investment fund your money is in.
You may also find that you have enough money to increase your contributions to plump up your savings. Some employers will be willing to do the same and perhaps even match your contributions up to a certain amount. It’s well worth investigating this. If you can pay in an extra 1%, and your company will match this, that is quite literally free extra money for you.
It’s a good idea to check your employers’ pension policy to see if you’re making the most of it. This will typically involve having a conversation with your HR department, logging on to the intranet or at the very least talking to your line manager about your company’s pension policy.
Sources:
Halifax, January 2024
Halifax, January 2024
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.
