When it comes to personal finance, there is a lot of misinformation floating around. Unfortunately, because talking about money is often a taboo topic, it’s all too easy to pick up and hold onto beliefs that either aren’t quite true or promote bad financial habits. In this article we explore two common money myths.
Myth #1: I'm too young to save for retirement
When first starting out in your career, retirement can feel like a lifetime away. However, thinking about your retirement is not something to put off.
Tax
The government wants us all to be saving for our futures, so they have created tax incentives for doing so. Saving towards your pension is tax-efficient as you are taxed on your income minus any pension contributions you make. The more you pay into your pension (up to a point), then the less income tax you will have to pay. Therefore, when you are thinking about the cost of your pension contributions, don’t forget to factor in that you are getting a tax saving which helps to offset that cost a little.
Employer contributions
In the UK, employers are required to enrol their employees into a workplace pension scheme (employees can opt out of this) and contribute at least 3% of your salary into your pension. Employees are required to contribute 5% of their salaries bringing the minimum total contribution going into your pension pot each month to 8% of your monthly salary. If you opt out of your pension when you are young, you are missing out on years of employer contributions which is essentially free money for your future self.
Compounding
One of the key reasons why saving for retirement is not to be delayed is the power of compounding - we will come back to this in Myth #2.
Myth #2: I need a lot of money to invest
Investing is often considered a wealthy person’s game, with large deposits required for investing in the stock market. However, this is untrue. When it comes to investing, when you start can be even more important than how much you have to invest.
Compounding
When thinking about when to start investing, compounding should be the first thing you consider. Compounding refers to making investment returns on the returns you have already made. So if you invested £100 and got a 10% return in your first year, your investment would be worth £110. The following year, assuming you made a further 10%, your investment would be worth £121 after two years. That extra pound represents ‘returns on returns’. This might not seem hugely significant at first but over time, it will really build up.
Trial and error
When learning something new, such as starting your investment journey, you will inevitably make mistakes and lose money. By starting to invest a portion of your savings from a young age, you can afford to make those mistakes while you have fewer financial responsibilities and plenty of years to earn more money and generate long-term returns. You can also use these years to learn what your appetite to risk is and how much risk you are willing to accept in order to get the returns you are looking for.
Commercial awareness
Learning about investing will inevitably help you develop your commercial awareness as you will start following the financial news and markets. You will learn to convert current affairs into an understanding of how global events may affect your finances, industries and companies. These skills and knowledge will help you in whatever career path you pursue.
Allowing money to remain a taboo topic among friends and family allows myths such as those discussed above to propagate. It’s important that we share the financial lessons that we learn - both good and bad - with others, so that we can all learn.