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Know Your Money: Five Essential Financial Tips When Starting Work
We often lament the lack of Financial Education and Capability among the population. Nearly half of us have less than £100 of Savings and are three missed pay cheques away from going hungry. Financial stress brings a terrible cost to mental health and relationships but is Financial Education in schools the answer? Many experts believe that it doesn’t work, that young people aren’t interested and that you can only impart wisdom at the moment of need. I believe that young people may not be interested in ‘Financial Capability’ but they are very interested in money!
At the very least, they should enter the world of work with an understanding of five vital things.
First, the miracle of compound interest, described by Einstein as “the 8th wonder of the World, the most powerful force in the Universe. Those who understand it, earn it. Those who don’t, pay it.” 7% a year, doesn’t grow your money by 70% over ten years, it doubles it. It doesn’t turn £1,000 into £3,800 over a 40 year working life but into £16,000!
Second, once you understand compound interest and want to avoid paying it, you’ll realise that it’s better to ‘save up’ for things you want rather than borrow for them. The only exception is buying a house or maybe a car.
Third, make sure you build up a ‘rainy day fund.’ If possible, aim to save up six month’s worth of spending. Then you’ll be able to cope with financial shocks.
Fourth, join your employer’s Pension Scheme as soon as you can and save as much as you can if your employer is willing to make matching contributions. Free money from your employer is not to be sniffed at.
Finally, if you are fortunate enough to have cash left over, open an ISA or a Lifetime ISA and put longer term savings above your rainy day fund into that.