Help a smart but inexperienced young man manage my money (UK)!
November 9, 2009 8:22 AM   Subscribe

You Are Not My Financial Planner. But I'm a (still barely) young man living in the U.K. Took a long time to get a career together, with 2 good degrees, but finally achieved slightly below average salary with slow growth prospects. What approach to savings / investments should I take?

Further to the above, I earn just below the national average (aout £1,300 monthly after tax etc) but hope to increase this in the next few years to just above the average (say £30k p.a. before tax). My job is in higher education libraries, which doesn't have huge prospects for salary increases. I guess maybe £40 or £50k in ten years is doable? I live frugally, don't even have a car, and rent at the lowest possible rate (about £400/month in !).

I've just got the point where I'm a "young professional" hanging out with others of my age (28) and realising they have way more financial sense (and success) than I ever have. I have about £1000 in a cash ISA. I add £50/month to it. That's it. Some of my peers have saved, invested and are now looking into buying houses. Why the disparity? Is it purely down to salary and willingness to risk on the markets?

Given that my aims in life are mainly just to get a modest house, raise a family, continue working like a dog until (or beyond) retirement, run a modest, boring car if I really need it for kids, work etc, take cheap inland holidays and live frugally til I die, what savings and investments should aim to get?

I'm already aiming to "save 3 months salary" as recommended by popular financial advice books. My bank supplied me with an "advice session" where the talk escalated quickly from my idea of investing £500-£1000 upfront then £50 per month in an investment ISA (in a medium risk band) to more like £200-£300 split 50-50 between medium and second-from-top risk bands... at this point I got cold feet and split.

I have a Masters in Physics so I can handle algebra but all the arithmetic makes my head spin (the sales pitch doesn't help!). I'm reading basic guides but I'm struggling to understand what I should do. My family never discussed these issues and I wonder if I'll ever afford to raise one of my own to teach them to... can anyone "hope me"?

PS. I know about etc and will continue to look into that. Pointers to specific relevant pages would be really welcome though! :)

PPS I have no debts except the usual UK student loan at about 20k, which I just ignore as a graduate tax. I only have credit cards in case I need to sign up to online stuff or prove I have a good record
posted by anonymous to Work & Money (9 answers total) 5 users marked this as a favorite
A equity ISA is proably a good idea but be careful that you aren't being stung for high fees. Legal & General or Fidelity would be a cheap option. Bogleheads is a good non-UK resource. I would suggest a index tracker as a good way to start.

If you are in Higher Education I suggest looking at the pensions which are likely to be better than private sector - you might want to max those out first.
posted by laukf at 8:32 AM on November 9, 2009

Don't put anything in stocks until you have three months expenses in a cash ISA.

Stocks are only for money that you are certain not to want for a long time, and certainly not ever in a hurry. So if you are saving for a car purchase or even a house deposit they are probably a bad idea.

Starting a pension is a good idea, and that can certainly be in stocks, since you don't want to use it for a long time, and you will have plenty of notice when you want to get it out again.

Consider carefully whether you really want to buy a house. Depending on your location and the interest rate and a bunch of other factors, renting can sometimes be cheaper. Remember that if you own a house, you are now spending roughly 1% of the house value per year on repairs and maintenance, and you need a good buffer of cash on hand in case the boiler breaks in the middle of winter or something.

Financial advice from a bank is biased (obviously). It's in their interest to sell you products that make them the most money. Clearly that could easily be the direct opposite of what's in your interest.
posted by emilyw at 8:48 AM on November 9, 2009

First of all I don't know most of the intricacies of investing in the UK, but my advice should be pretty much universal.

I have about £1000 in a cash ISA. I add £50/month to it. That's it. Some of my peers have saved, invested and are now looking into buying houses. Why the disparity? Is it purely down to salary and willingness to risk on the markets?

It's true that more risk translates to more reward, but even relatively risky investments take a long time to generate significant earnings. Any kind of investment advertising gains of more than around 10% per year (on average) is usually some kind of scam.

So really the key to building up a large amount of money is pretty boring: save significantly more than you spend, and put most of what you save into low-cost long-term investments. For example, right now you are saving a little less than 4% of your after-tax income in your ISA. That's a good start, but you probably want to be saving more, and if unexpected expenses come up you will want to have a bigger buffer in terms of income that you're not spending and cash reserves. And for long term saving (i.e. money that will sit in an account for the next 30 years or so) you should probably invest in the stock market, preferably in the form of low-cost mutual funds.

My bank supplied me with an "advice session" where the talk escalated quickly from my idea of investing £500-£1000 upfront then £50 per month in an investment ISA (in a medium risk band) to more like £200-£300 split 50-50 between medium and second-from-top risk bands... at this point I got cold feet and split.

My policy is to never trust financial advice from someone who stands to gain from me making certain kinds of investment decisions. For obvious reasons, that kind of advice is going to be more geared toward making commissions than maximizing your returns. I would suggest either researching from un-biased sources on your own (such as general investment books or websites) or using a fee-based financial advisor.
posted by burnmp3s at 8:54 AM on November 9, 2009

1] Read The Richest Man In Babylon.

2] Sock £3,600 into an ISA every year. That's £300 a month. It's tax free. Chances are, you wont miss the money if your outgoings are as small as you say, and if something major does go wrong, you'll have a nest egg to draw from.

3] Start a pension. The difference between starting at 28 and 38 is staggering. You'll get far more back if you start now than if you start in 10 years, even if you invest the same amount of money over the term. This is due to compound interest. By the time you retire, there will be no state pension. Look into employer contributions.

4] Don't save three months of your salary. Save three months of living expenses. They might work out to the same amount, but they might not. Save whichever is higher. If you never need to use the money, you haven't lost anything, and if you do, it's there. Look into inflation beating savings if you just want to stick the money in an account and forget about it.

5] Check out
posted by Solomon at 9:33 AM on November 9, 2009

I'd recommend the book "Your Money or Your Life" - or perhaps this review in the SimpleDollar blog which explains the lessons in it. It is an old book written for a mainly American audience and some of its advice on investments is possibly a little too conservative for you. It's great strength is that it sets out a clear long-term goal for financial planning (you want to get to a point where you are financially independent) and then offers a set of achievable steps on how to get there.

Since you understand maths I'd also recommend you do a little revision on the mathematics compound interest. It is good to know the potential of this to enrich savers and impoverish borrowers - but equally important it will help you seek out good financial products and advice.
posted by rongorongo at 10:32 AM on November 9, 2009

I know nothing about finance, but I do know friends. Don't get bogged down too much with what they're doing with their lives, how much their earning, that they're buying a house, that they're packing it all in to travel to Australia on a donkey or whatever.

They might be sitting on a couple of grand that was left to them by a dead relative 10 years ago.

Or they might have had it drummed into them from a very early age that investing in property is the only way to look after money and that you should aim for that no matter what (thanks, Dad!)

Or they might be very good at saving.

Don't get bogged down with their 'success', never compare your inside with somebody else's outside

But make sure you've got some savings to cover yourself in case it all goes tits up.
posted by Helga-woo at 11:40 AM on November 9, 2009

Can I just say that, there will be a state pension when you retire, of course how much it is a week- that's up to the politicians you elect. We do know that you probably won't be able to draw it until your at least 68.

Relying on the state pension is a mugs game however, so if you don't have a pension with your employer, or you do but its not a defined benefit scheme (such as a final or average salary schemes), then you should look at your options.

Pensions are fiendishly complicated, but it pays (both in money and stress avoided) to get a handle on it sooner rather than later.

Everyone in the UK is addicted to property, but whilst the property boom madness is misplaced, on a basic level buying a house/flat is not an entirely stupid thing given that the number of places-people-actually-want-to-live near jobs-people-actually-want-to-do is limited (lets not even factor in schools-people-would-actually-want-to-send-their-kids-to yet). If I was you I would sort the pension situation (at least to the point of knowing what you need to do and starting to do it) and save as much of your income as you feel happy doing so in a cash isa with the aim of building up a 10-15% deposit on a house - (if you go over your cash isa limit you can put it in a 2 year bond. If your feeling daring why not alternate by putting some money into a stocks and shares isa when the economy hits two quarters of non-negative growth.)

I'm not saying buy a house now! I'm saying put in place the bridge to get you to buying that house whe the time will come that you want to buy it. If you really want to buy a house but don't have a willing potential life partner available, look at options such as buying with friends (make sure they are reliable friends!) or family (ditto). Realise early on that you might be buying ex-local authority.

If you don need a car - and needing to show off doesn't count btw.- then don't get one. The cheap ones break down, the expensive ones depreciate. They are money sinks, end of story.

And don't forget to find ways to treat yourself and enjoy your new found sortedness!
posted by munchbunch at 11:57 AM on November 9, 2009

If your struggling to meet your savings targets, try 'nudging' by committing to saving your future salary increases. You can pre-emptively set up standing orders to take a good percentage of our raise straight into your savings, but it doesn't feel like your loosing out the same way it does committing money you already have: the so-called endowment effect.
posted by munchbunch at 12:04 PM on November 9, 2009

Ask this in the savings board in the forums of, webpage of GMTV expert Martin Lewis.
posted by Neonshock at 12:47 PM on November 9, 2009

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