18th October 2016 at 8:37am
When I ask my parents about what they were doing with their finances at my age, 23, they tell me that they were simply trying to make ends meet and, most shockingly of all, that they pulled out of their pensions as they didn’t see the point in paying in!
This could not be further from the way I think about money, when I ask my friends what they are doing to save for the future, almost everyone is paying in to a pension and most have a savings account. Many of us are paying off student loans, and the more financially savvy also have an ISA.
50% of your income should go towards living expenses
It seems that us youngsters are somewhat aware of the importance of saving, and use different saving vehicles to ensure we have a nice little nest egg to look forward to.
What do I mean by being financially independent?
As I become more aware of the benefits of saving and investing through my job, it presses upon me more and more that eventually I would like to be financially independent. But what do I mean by financially independent? Well, I mean to say that I want to reach a stage in my life where I do not worry about money at all, and can do as I wish without money being an issue.
This, to some, may seem like some kind of state of nirvana, an unreachable goal which is only a dream. But from doing some research, it has been done, and can be done. And now, in my early twenties, it seems like as good a time as any to begin the journey and do my utmost to reach that goal.
So, what do I need to do to put the building blocks in place to reach financial independence?
Saving is key
Financial independence is never going to be achieved if a saving strategy is not in place, and this will change over time as your salary increases and your needs develop. According to The Economic Times;
‘As a rule, 10 per cent of the post-tax income of those starting their career at around age 25 can be the starting point.’
Saving 10% of post-tax income gives you a solid starting point
This allows you to have a solid starting point and gives you a small aim for each month, this can be done easily by setting up a direct debit to a savings account so that you don’t even notice it going out of your pay check each month. There are loads of different spending and saving strategies which can help you take control of your finances, and as The Economic Times highlights, the 50-20-30 rule is a great one;
’50 per cent of your income should go towards living expenses, i.e., household expenses, including groceries; 20 per cent towards savings for your short, medium, long-term goals; and 30 per cent towards spending, including outing, food and travel.’
I think this is a perfect rule of thumb as making things simple in finances is the key to success. I myself have employed this rule and am actually having great success with it! And this rule brings me on to my next point…
Live an economical existence
Living economically doesn’t have to mean being cheap, step one is to budget and to save, the 50-20-30 rule helps you do this easily. In order to save as much as possible it is key to live within your means and squirrel away as much as you can. According to the article 7 ways to achieve financial independence by retirebyforty;
‘Financial independence begins when your net worth exceeds 25x your annual expenses.’
Living economically doesn’t have to mean being cheap
And if this is the case, that means you need to start saving NOW.
Get on the property ladder
We all know the feeling all too well that renting a property is just like pouring your pennies down the drain, it can be really depressing and can often feel like you will never reach the dizzy heights of becoming a home owner. But saving as much as you can now could make the prospect of getting your own home a reality. Nearly all of my friends see buying a property as one of their main goals, but hardly any of them actually have a saving strategy in place to make this dream come true.
Ambition is the key to success
Saving in to an ISA can be a great option to get your deposit together, there are also a number of government run schemes to make buying property for the first time easier.
Get that raise!
It has been said that ambition is the key to success, and likewise, career ambition is the key to financial independence. In order to save more as you get older, your pay needs to increase and the most feasible way to do this is career progression. According to retirebyforty;
‘…you need to invest in yourself and get good raises. Each career is different and it might take education, becoming an expert in a niche, working extra hours, and/or networking with the right people. Your pay check needs to outpace your expenses so you can save and invest more.’
And so, no matter how young or old you are you need to think about how you are going to increase your pay and save as much as possible.
You could also choose to do this through getting another part time job or even taking the plunge of starting your own business. And after all, self-progression is always a good thing, whether that results in more money or not.
Save in to your pension too!
So, we have looked at saving in general for the future and to buy property, but one of the best savings vehicles at your disposal is a pension. This is what will give you the most freedom when you retire and is what you’ll derive your income from, so get saving now. I save as much as I can afford in to my pension, and starting early is the best pointer I can give. The more you save, the more you’ll have, and the earlier you start, the more chance your money has to grow. It’s truly a no-brainer.
Why not try the Standard Life Pension Calculator to see how much you could have in the future.
And so, if you follow each of the points I have set out you’ll be well on your way to achieving financial independence in your old age. A little hard work now will ensure you don’t have to when you’re in your twilight years. And remember, you’re never too young to start saving seriously.
The information in this blog or any response to comments should not be regarded as financial advice.