Millennials risk missing life milestones due to short-term saving strategies

Millennials have good short term money habits. However, a lack of focus on the future means they could risk missing life milestones that are important to them.

Despite social changes, UK millennials still hope to tick off traditional life milestones. The top life goals young adults want to achieve in the next decade, according to research from F&C Investments, are:

  • Buying a property
  • Getting married
  • Having a family

But their current approach to finance could mean these milestones are missed. Millennials’ general focus on the near future is reflected in their good short-term money habits:

  • 60% would rather miss out on special occasions than borrow money so they can attend
  • 68% plan to save more money in 2018 than they did in 2017
  • 60% do not have an overdraft
  • 40% do not have a credit card

However, despite aspiring to significant milestones that require money, regular savings with a long-term view are more challenging. With inflation outpacing salaries, it’s perhaps unsurprising that young workers are struggling to consistently save money. The main reasons cited for not putting more away were:

  • Paying essential bills (61%)
  • Lack of earnings (41%)
  • Debt (39%)

It’s a trend that means 7.8 million millennials don’t have any long-term savings or investment products that will help them achieve their life ambitions. It places milestones, such as buying a property or getting married, at risk.

The long-term saving options for millennials

If you’re a millennial or a parent or grandparent to one, there are some long-term saving products to consider. Making these products a part of monthly budgets alongside day-to-day expenses can provide financial security while taking steps towards larger goals.

These options are a good place to start if you’re new to long-term saving and investing, providing you with a foundation to build on.

Individual Savings Account (ISA)

Each year you can put up to £20,000 in ISA accounts. This can be spread among the options below. ISAs are a tax efficient way to save; you won’t pay Income Tax on the interest or dividends you receive.  If you choose an investment option, profits made are free from Capital Gains Tax too.

There are four types of ISAs millennials should consider when deciding to save:

1. Cash ISA: A Cash ISA is a good option for medium term savings. For example, a wedding that you’re planning that’s two years away. You’ll receive interest on the money that you add to the account and can withdraw it at any point; however, if you withdraw money, your annual ISA allowance does not increase.

Assuming you stay within the limits set by the Financial Services Compensation Scheme, the money you place in a Cash ISA is safe.

 2. Stocks and Shares ISA: If you have long-term goals in mind when saving your money, a Stocks and Shares ISA is an option that can deliver higher levels of growth. As a rule of thumb, you should be looking to invest for at least five years. This makes it a good option if you’re saving to buy a home in the future or for university education for young children.

Investing does come with risk. The value of your ISA is likely to temporarily decrease at times, as well as rise. The value of your ISA will depend on the assets that your money is invested in. A Stocks and Shares ISA will usually give you several different risk profiles to choose from.

3. Help to Buy ISA: With many millennials aspiring to be homeowners, a Help to Buy ISA can be an attractive option. Every first-time buyer can open a Help to Buy ISA from the age of 16.

When you open a Help to Buy ISA, you can deposit up to £1,200 in the first month, and then £200 in subsequent months. The money you put in will generate interest and will have 25% added thanks to a government bonus. The bonus is given on values up to £12,000; making the maximum bonus available £3,000.

However, even if you deposit the maximum amount each month, it will take you over four years to receive the full benefits of a Help to Buy ISA in terms of the bonus. If you can afford to put more away each month and plan to buy sooner, a Lifetime ISA may be a better option for you.

4. Lifetime ISA (LISA): A LISA can be opened by those aged 18 to 40, and you can continue to add money until you’re 50. It’s designed to help individuals save for a deposit for their first home and retirement.

Each year you can put a maximum of £4,000 into a LISA. The government will then add a 25% bonus. If you were to open a LISA when you turned 18 and deposited the maximum amount each year, you’d receive £33,000 in ‘free cash’. With a LISA, you can choose from cash or stocks and shares options, allowing you to also benefit from either interest or potential investment returns.

The drawback with a LISA is that the money can only be withdrawn without a penalty if you’re buying your first home or have turned 60 to fund retirement. For any other reason, you will lose the government bonus acquired and a portion of your own deposits.

Workplace Pension

On top of savings accounts, a Workplace Pension is an excellent place to start when looking at ways to build long term financial security.

Most millennials will now have been enrolled in their Workplace Pension scheme through auto-enrolment. You can opt out of this but it’s not advisable; it’s one of the most effective ways to save for retirement.

If you are part of your Workplace Pension scheme, money will be deducted from your wage automatically. In most cases, you’ll also then benefit from employer contributions and tax relief; helping your pension to grow faster. With these benefits in mind, opting out of a Workplace Pension is short-sighted and is highly unlikely to be in your best financial interests in the long term.

If you’re struggling to manage finances now, it can be tempting to opt out of a pension. But when you think about ticking off life milestones, giving up work and enjoying your retirement is probably on there. It’s never too late to start a pension but, that being said, it’s far more manageable to secure a comfortable retirement if you start sooner.

Whether you’re struggling to tick off milestones as a millennial or you want to lend your support to children or grandchildren, we can help you. Getting to grips with finances, with both short and long term goals in mind, while still a young adult can help create the foundation for financial security throughout later years.