You’ve done the hard work, passed your exams and tossed your mortarboard into the air. You may have even spent some time in India, finding yourself. Now you’re ready to enter the world of gainful employment.
Along with the excitement of starting your career, a job brings with it the enticing prospect of having money to spend, and the responsibility to spend it wisely. How much you get can depend on your degree and chosen profession. The mean salary for graduates leaving university was £19-20,000 in 2016, according to graduate-jobs.com1, but top-of-the-class graduates of red-brick universities will be best-placed to snap up the most prestigious graduate scheme roles, which tend to pay above average. Law and investment banking are two of the highest-paid graduate sectors, with median starting salaries of £41k and £47k respectively, while public sector and retail graduate positions average £21k and £26k respectively2. So, those at the top of the chain could be taking home £2,900 per month, with the lowest-paid graduates getting a £1,180 monthly salary3.
Whatever you’re paid, after years of surviving on a budget through university, the luxury of earning a good salary can be something of a shock to the system. When suddenly you have a regular income, at least some of which is disposable, the temptation to splurge can be overwhelming. After all, you’ve worked hard for this, and you’re young, so it’s time to enjoy, right?
Well, yes (and far be it from us to be kill-joys), but before you book that two-week blow-out in Ibiza, consider this piece of advice from the world’s most successful investor, Warren Buffett: “Don’t save what’s left after spending, spend what’s left after saving.”
He’s not saying don’t enjoy yourself. He’s saying consider saving, however much or little you can afford, as part of your monthly outgoings that are absolutely fixed and unchangeable. Then spend the rest, as you see fit.
What people like Warren Buffett already know is, establishing a good regular savings habit when you’re young is one of the most financially smart things you can do, and one of the best ways to boost your future wealth. The reason being, someone in their 20s has a large and unassailable advantage over all other savers – time – which means more years to benefit from the power of compound returns.
Another thing to consider is what to do with your money. There’s always a place for an emergency cash fund to cover unexpected costs (three months’ expenses is generally considered a good buffer) but beyond that, with interest rates being what they are today, your cash will struggle to beat inflation in a standard high street savings account. If you’re willing to accept a little bit of risk, you could try investing. These days you don’t need a lump sum and it’s really simple and quick to get started. If you’re not sure what you’re doing, there’s services that will do all the investing for you, for a low annual cost.
The younger you are, the better the head-start you’ll get. A 20-year-old opening a medium-risk investment plan, for example, with a £100 initial deposit and investing just £50 per month, could have a pot worth nearly £70,000 by the time they’re 55. If they’re willing to accept higher risk, their pot could be worth closer to £100,000.
Starting just 5 years later, at 25, could have a considerable impact. The same £100 and monthly £50 contributions (again, on a medium risk plan) might only reach around £48,000 by your 55th birthday. Delay by 10 years, and you might reach just £33,000.
The moral is, starting early and saving over the long-term is far more important than waiting until you can commit large sums each month, and if you put something aside each month from your very first payslip, the chances are your future self will be very grateful.
*Predicted values are based on an investor making a £100 initial deposit into a medium-risk (Confident) or higher-risk (Adventurous) Wealthify ISA plan, and subsequent payments of £50 per month for the durations specified. Predicted values are calculated using ARC benchmark data which comprises data on the past performance of hundreds of comparable private investment plans, these figures are used for illustrative purposes only and are not a reliable indicator of future returns. With investing your capital is at risk and you may get back less than you put in.
1 Source: Graduate-jobs.com https://www.graduate-jobs.com/gco/Booklet/graduate-salary-salaries.jsp
2 Source: The Telegraph, 18/1/16: http://www.telegraph.co.uk/education/universityeducation/student-life/12104502/How-to-get-a-well-paid-graduate-job-in-2016.html
3 Source: http://www.netsalarycalculator.co.uk/