Episode 331 - On this week's podcast I talk about the money mistakes to avoid in your 20s and 30s. I also discuss what to look out for before downloading any financial apps, be they investing or budgeting. Finally, Harvey discusses the 7 reasons/occasions when you should review your life insurance policies.
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Abridged transcript - Episode 331
Below is an abridged transcript of episode 331, including timestamps.
Money mistakes to avoid in your 20s and 30s
Damien Fahy 3:32
If you're listening to this and you are in your 20s and 30s, don't worry, you're going to make loads of money mistakes. I made a lot when I was in my early 20s. And this isn't a lecture. This is just a piece that's pulling together some observations of mine about things I wish I could have said to the person that I was in my 20s and 30s. Making mistakes is not the biggest problem, it’s not learning from them that is.
Spend less than you earn
So let’s start with the obvious, don't spend more than you earn. Like most people I didn't truly appreciate and learn this lesson until later in life. It’s the first money lesson that everyone needs to learn if they want to be successful with their money and grow their wealth.
Track your spending habits
Back when I was 20 there weren't any apps available to help you track your spending. I don't think the iPhone even existed. But today there are now apps that allow you to track your spending automatically by hooking up to your bank accounts. There are also banks that offer these services within their own banking apps. These apps give you an instant insight into where your money is going, what you're spending on bills, what you're spending on discretionary spending such as going to the pub or whatever it might be. If you can’t quantify your money you can’t control it.
Tracking your spending will help you take control of your money. Read our article "Best budgeting apps" in the resources section below for more information.
Don’t live off your credit cards
There is a temptation to live off your credit cards which means accruing unnecessary debt rather than repaying your debt and living within your means. That also means avoiding withdrawing money out of ATMs on your credit card. Withdrawing cash on your credit card is one of the worst things you can do because of the charges associated with doing so.
Don’t assume that you will be able to clear the debt in the future. If you can’t afford the debt now the chances are you won’t be able to afford it in the future either. By living off your credit cards you are putting pressure on your future self to deliver and pay back the money that your current self is actually spending. Or in other words, you're borrowing from tomorrow to pay for today. That is a recipe for disaster as there is always a crunch point where you have a reality-check that you've got to pay the money back. That is painful.
Accruing excessive debt when I was young hampered the future things that I wanted to do, because I had to eventually face up to the realisation that nobody else was going to pay the money back for me.
Build a spending plan - not a budget
So the advice is don't live on your credit cards, track your spending and start to budget. But the word budgeting is always loaded with negative connotations. So think of it as a spending plan instead. It has much more positive connotations and increases your chances of sticking to it. Plan where your money is going to go and how you want to spend it.
Save and invest in as soon as possible
The other thing I wish I'd done in my 20s and 30s was save and invest more money. I’d be wealthier now and have more options.
Now there was an interesting line that I heard the other day that you need to learn to save when you're broke. The idea behind it is that if you have no money and you learn to save even £5 or £10 a month then when you eventually earn more money you will have that saving behavior ingrained and you'll start to save more and more money. That is how you grow wealth.
Listen to our podcast "How to be a millionaire" listed in the resources section at the foot of the page.
Pay into your pension
Pay into a pension. Auto-enrollment has helped a lot of people get started paying into a pension.
If you are employed and you pay 3% of your qualifying earnings (qualifying earnings are between £6,240 and £50,270) into your workplace pension scheme then your employer must pay 5% into the pension as well. That’s free money!
But you must still understand that auto-enrollment isn't going to be the thing that saves you in retirement, as you're gonna have to put more money into your pension than is legally required under auto-enrolment.
A rough (imperfect) rule of thumb is to try to put at least half your age in percentage terms of your earnings away into a pension. So if you are in your 20s aiming to put at least 10% of your earrings into a pension is a good starting point.
Don’t be too cautious
Don't be overly cautious in your investment selection, particularly within your pension. You have time to invest and for your investments to recover before you access them. If you don’t need to access the money for 10 years then you should consider investing in equities. You can do this via funds as you don’t have to buy shares directly.
Build an emergency fund of 3-6 month wages
See our article ‘"Building an Emergency Fund – the what, why & how" listed in the resources section at the foot of the page.
Don't try and get rich quick
The problem we've got now is that people in their 20s want to buy a house but house prices are continuing to rise. They are therefore tempted to try and “get rich quick” in order to get on the property ladder which means taking excess risk with investments such as cryptocurrencies.
It’s important to not be too cautious as mentioned earlier but that doesn’t mean being reckless. Investing should be boring but that doesn’t mean that you won't make money. You can make an average return (after inflation) of 5% per annum when investing in shares according to the Barclays Equity Gilt Study.
Set financial goals and start planning
The older you get, the more you suddenly realise the benefits of planning. So if you want to buy a house, if you want to earn more money and be wealthy in the future you've got to make a plan of how you're going to achieve that.
Take career risks
When you're young, you can afford to take risks in terms of your career. You probably won’t have a mortgage or dependents so you can afford to take a drop in income for a short period of time. Don't spend your evenings watching EastEnders, instead try and build something in the background (a side hustle), maybe develop a hobby, that could ultimately become a business or that cuould help you learn new skills that could further your existing career. Money to the Masses was developed as a side enterprise while I worked full-time.
Listen to the One Giant Leap podcast series for inspiration. Just search One Giant Leap in the search bar.
Learn the difference between good debt and bad debt
For more on this listen to podcast episode 297 (listed in the resources section at the foot of the page). The simple concept is that good debt is debt that can improve your financial position over the longer term. Good debt usually comes with a plan of how to repay it and you usually shop around for the best deal. So a good example of good debt is something like a mortgage.
Bad debt is just using debt to buy things that don’t improve your financial situation over the long term, such as frivolous things.
The importance of owning assets
If you want to try and increase your wealth over time the way to do that is to own assets. So that might be property or investments. It's not owning cars, trust me, as you end up losing money. The aim is to build a pot of money that makes money for you while you're sleeping. For more on this listen to "MTTM Podcast Episode 274 – How to increase your wealth and retire early" which is linked to in the resources section at the foot of the page.
What to watch out for in financial apps
Andy Leeks 16:20
Okay, so the next piece we're going to talk about is financial apps.There are tons of different financial apps you can get, there are budgeting apps, cashback apps, investing apps, banking apps, so Damien you're going to kind of run through the things that people should be looking out for when downloading apps from the Apple store or on the Google Play Store.
Damien Fahy 16:46
I’ve broken it down by type of app...
Pocket Money Apps
- Keep an eye on costs - most apps charge monthly fees as well as extra fees for additional top-ups which soon ad up. NatWest Rooster Money (£19.99 per year or £1.99 per month) and Go Henry (£35.88 per year) are the most popular, however, there is a new provider ‘Hyperjar’ that does the same for free.
- Check how many accounts you get - Revolut Junior offers something very similar ti the above, however, it is limited to one child (if using the Revolut Free account - you can add additional children on the Plus, Premium and Metal accounts), whereas you can have multiple cards for multiple children with Hyperjar.
- Beware of the lack of FSCS protection - Money held in these apps are not usually protected by FSCS, but pocket money app providers like to state that as they are not banks, they do not lend money out or re-invest it and so there is very little risk. While not FSCS protected, the money is instead kept in segregated accounts governed by the e-money regulations of the Financial Conduct Authority.
- Don’t overpay - Some budgeting apps such as Emma charge a £59.99 annual subscription for access to premium features (such as customisable transactions) and so it is worth doing your research and seeing which features are most important to you and whether or not they are worth paying for. Some budgeting apps - such as Money Dashboard - go a little further and provide additional features for free that other budgeting apps charge for.
- Data privacy - If you are sensitive about your data and wish to keep it private then you could use Moneyhub. They charge 99p a month (or £9.99 annually) in return for keeping all of your spending data private.
- Beware of in-app offers - Many budgeting apps make money by offering deals from selected providers, however, it is always wise to check and see if there are better deals available elsewhere. For example, Emma is offering £2 cashback when ordering Pet supplies from Tails.com, whereas Quidco - a specialist cashback app - has an exclusive offer of £19.96 cashback.
- Watch out for auto-enrolments - Another thing to be aware of is auto-enrolment after an initial free trail. Chip for example, will auto-enrol new users into its paid-for ‘ChipAI’ plan which costs £1.50 per month, after the initial 28 day free trial. You have to downgrade to the free plan if you don’t want to pay.
- Roundups and overdrafts - most budgeting/banking apps now offer auto roundups (saving your spare change) but make sure you understand how they work when it comes to your overdraft. Some will still allow you to use roundups when you are in your overdraft. If you don’t want that to happen you need to turn it off.
Investing apps can help to simplify and even automate the process of investing, however, there are a few things to be aware of.
- Check investment choice - Some investing apps can be limited in terms of what you can invest in, limiting users to a selection of just a few funds in some cases.
Watch out for monthly fees - Some charge monthly fees on top of the usual platform and fund fees, making it a relatively expensive way to invest small amounts of money. Moneybox charge a £1 a month fee, plus a platform fee of 0.45% and fund management fees of between 0.12% and 0.28% That being said, the monthly fee does give Moneybox users access to its neat round-up feature allowing them to invest their spare change.
- Check whether interest rates are actually that - Make sure you know what you are getting when you sign up. Chip, a savings and investing app proudly states that you can earn 1.25% ‘The market’s best return’, however, it isn’t an interest rate, it is a 1.25% ‘bonus’ that is paid when you share a VIP pass with a friend. It is sensible to do your research and know what you are getting as well as knowing what you might be expected to do in return.
- Minimum investing amounts - It is worth noting that some financial apps have a minimum investment amount, for example users investing for the first time with Nutmeg will need to deposit an initial £500. Make sure you check the minimum investment amount before you commit to investing via an app as some - such as Wealthify - will allow you to invest from as little as £1.
- Check all charges don’t just focus on commission-free - There are a number of popular trading apps, many of which claim to let users trade stocks ‘commission free’. While the stock trade itself may be commission-free, there are often a host of other charges that users should be aware of. Etoro for example charges users a withdrawal fee $5 every time they wish to make a withdrawal, a 0.50% currency conversion fee on every deposit and there is an inactivity fee of $10 every month if an account has been inactive for a year or more.
- Check products available - Many trading apps are limited to just a general investing account or Stocks and Shares ISA, with no option to invest in other products such as a Lifetime ISA or SIPP. Etoro doesn’t even offer a Stocks and Shares ISA.
Cashback apps are free to download and work by providing a set amount of cashback when you click on a relevant offer within the app. The cashback is credited to the account after a set amount of time and users can either withdraw the money to their bank account or boost their cashback by up to 30% by choosing to spend the cashback at one of the selected partners.
- Check t&cs & shop around - The cashback offer is usually not available in conjunction with any other offers and so you should make sure that there are not any better offers elsewhere or by going direct to the retailer. Also be aware that some cashback offers can take a long time to credit, up to 9 months in some cases.
- Can you pay in cheques - Most banks have an app these days and most allow users to do everything they can do online or in the bank itself, even paying in cheques. Some apps are better than others and while digital banks such as Monzo and Starling have drawn a lot of praise for their tech, there are some shortfalls. Paying in cheques is a good example with Monzo insisting that it is sent to them in the post. Monzo says it can take up to 7 days to receive a cheque and a further week to process it.
- Don’t just use the in-app marketplace - Some banking apps offer access to third party services and products but you should still shop around as you may get better deals elsewhere.
- Watch out for limits on accounts e.g Monzo you can withdraw £200 a month abroad fee-free, you will be charged a fee above this and Revolut has a £200p/m or 5 atm withdrawal limit.
Check the refer a friend incentive - If you love your financial app and regularly tell your friends about it you may as well earn rewards when doing so. Most apps offer great incentives for recruiting others, often paying up to £25 per referral. Freetrade has an interesting refer a friend incentive that credits both the user and the friend with a free share worth up to £200 when they sign up.
When to review your life insurance
Andy Leeks 26:42
And so for the next piece of the podcast, I'm going to be talking to Harvey. Now Harvey has been on the show before. But there will be listeners that haven't listened to the previous shows. They'll be new listeners as well. So could you just briefly explain what it is you do at Money to the Masses? And why we've got you on the show this week.
Harvey Kambo 27:06
Hi, Andy. Yes, of course. And so I'm Harvey, I'm the personal insurance editor at Money to the Masses. And my background is that I've worked in the personal insurance industry for many, many years. My passion is giving people advice and knowledge about how to protect themselves against things like death, serious illnesses, and also things that protect your income. So income protection, but today we're going to focus on life insurance.
Andy Leeks 27:37
Okay, so as you say, Harvey, we're here to talk about life insurance. And you're specifically going to focus on reasons why you might want to review your life insurance.
Harvey Kambo 27:46
That's right. And so there are certain life events that happen when we need to review and reflect on our life insurance, it may be because we want to change the amount of life insurance we have, how long we have that life insurance for or just who it's going to be payable to, who the beneficiary of that money will be. And these things do change with life events. And it's important that we go back and check that our life insurance reflects our wants and desires in the way that we feel is right for us.
For full details on when to review your life insurance read Harvey’s article "7 reasons to review your life insurance" in the resources section below.
- 7 reasons to review your life insurance
- The 10 best ways to avoid inheritance tax
- The best budgeting apps in the UK
- How to be a millionaire (podcast)
- Building an Emergency Fund – the what, why & how
- MTTM Podcast Episode 274 – How to increase your wealth and retire early
- Good debt versus bad debt - podcast episode 297