Starting Work: Kickstart Your Financial Future

Following last month’s article ‘How Much Money do I Need to See a Financial Adviser’, this article is the first in a series exploring where you might be at different stages of your life and the important things you might want to consider as a result…

Entering the workforce is an exciting milestone, filled with opportunities and new experiences. Along with the excitement comes a crucial responsibility: financial planning. Starting your financial journey early can set you on a path to achieving your long-term goals, and the sooner you start, the better your chances of success. One of the most powerful tools at your disposal is the concept of compounding, which can significantly enhance your financial growth over time.

The Power of Early Financial Planning

When you start working, it might seem like there’s plenty of time to think about long-term financial goals. However, beginning your financial planning early offers several distinct advantages:

1. More Time to Grow Your Investments: The earlier you start investing, the more time your money has to grow. Even small contributions made in your 20s can turn into substantial sums by the time you retire, thanks to the power of compounding.

2. Building Financial Discipline: Developing good financial habits early sets the foundation for a lifetime of financial stability. Learning to budget, save, and invest wisely from the start makes it easier to manage your finances as your income grows.

3. Achieving Long-Term Goals: Whether it’s buying a home, starting a business, or travelling the world, early financial planning helps you set and achieve your goals. By planning ahead, you can make informed decisions that align with your aspirations.

Understanding Compounding: Your Money's Best Friend

Compounding is often referred to as the eighth wonder of the world, and for good reason. It’s the process where the returns on your investments generate their own returns, creating a snowball effect that can significantly increase your wealth over time. Here’s how it works:

1. Earnings on Earnings: When you invest money, you earn returns (ie, interest). Over time, these returns are reinvested, generating additional returns. This cycle continues, causing your investment to grow at an accelerating rate.

2. Time is Key: The longer your money is invested, the more pronounced the effects of compounding. Starting early gives you the advantage of time, allowing your investments to compound and grow exponentially.

3. Example of Compounding: Imagine you invest £1,000 at an annual return of 4%. After one year, you’d have £1,040. In the second year, you earn 4% not just on the initial £1,000, but also on the £40 interest from the first year, resulting in £1,081.60. Over decades, this compounding effect can turn modest investments into significant wealth.

These figures are examples only and they are not guaranteed  - they are not minimum and maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this.

Practical Steps to Start Your Financial Journey

1. Create a Budget: Track your income and expenses to understand your financial situation. Allocate funds for savings, investments, essential expenses – and of course fun!

2. Establish an Emergency Fund: Aim to save three to six months’ worth of living expenses. This fund will provide a financial cushion in case of unexpected events.

3. Start Investing Early: Even if you can only invest a small amount, starting early allows you to take advantage of compounding. Consider a mix of investment options based on your risk tolerance.

4. Take Advantage of Employer Benefits: Since October 2012, UK employers have been required to offer a workplace pension scheme to eligible employees, often referred to as auto enrolment. If you’re not eligible, or are self-employed, it would be wise to start a personal pension even if you can only pay in a small amount each month

5. Seek Professional Advice: Financial planning can be complex, so don’t hesitate to seek advice from a financial adviser. They can help you create a personalised plan that aligns with your goals and risk tolerance.

Your Future Self Will Thank You

Starting your financial planning as soon as you enter the workforce can make a world of difference. The advantages of early planning, coupled with the power of compounding, can set you on a path to financial success and security.

For example, if you save £200 a month into a pension from age 20, your fund could be worth £349,000 by the time you’re 67. If you don’t start till 40, its estimated worth would be £123,000¹

By making smart financial decisions now, you’re not just securing your future; you’re also paving the way for a life filled with opportunities and peace of mind.

And remember, the journey of a thousand miles begins with a single step. Take that step today, and your future self will thank you.

Next month’s article will consider the next lifestage of getting married or entering into a civil partnership. In the meantime, if you would like to get in touch, please telephone: 01442 874888 or email stringermann@sjpp.co.uk.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested. 

¹ This calculation is based on contributions invested each month, increasing by 2.5% a year, with growth after charges of 2.4% a year. These figures are examples only and are not guaranteed. All monetary values shown have not been adjusted for future inflation. They are not minimum or maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this.