Financial planning is the last thing on your mind during the stresses of third year. You’ll still be dependent on student loans and bailouts from your parents but once you graduate, things will change. This is why before you graduate, it’s wise to start thinking about financial planning.
As you learn to live without the student status safety net, take a look at these tips for managing your post-university finances, provided by personal pension and Stocks and Shares ISAs provider, True Potential Investor.
Step 1: What are your goals?
Whether you need a car to get you to your new job or a place to stay post-student accommodation, your goals will likely be unique to you.
Although it may seem a long way off, your pension should definitely be on your radar. Planning for your retirement so soon after your graduation might seem odd, but planning early is crucial to ensuring your comfort in later life. True Potential Investor’s Tackling The Savings Gap Report Q3 2016 has found that we put an average of £325 a month towards our pension, so it’s important to start contributing as soon as we can to make sure we can reach our goals.
Above all else, make sure your goals are achievable. You don’t want to leave yourself without and cause a strain on your finances. You may want to categorise your goals based on timescales. For example, a short-term goal might be buying a car, while a long-term goal could be contributing to your pension.
Step 2: Quantify your goals
Quantifying your goals make them harder to ignore and fall behind on. Your goals will only become achievable if you can iron out details and decide roughly how much you need and when by.
Set yourself realistic timescales to achieve your goals by. Choosing a large amount over a short period of time could be unachievable and place unwanted strain on your current finances or resources.
Step 3: Budget
Before you can realistically determine how much you can contribute towards your goal, you’ll need to consider your monthly finances in depth. Your financial situation will influence how much you can comfortably set aside. Create a list of your current monthly income and work out your monthly expenses. Categorising your outgoings together — such as housing, utilities, transportation, food, and entertainment — will make it easier to make sense of your current situation. Make sure that you paint a true picture of your finances.
Identify areas of potential cut-backs. Look for non-essential extras — could you replace your daily coffee shop coffee with a homemade one instead? Ditch the extra drinks on a night out and pre-drink at home instead? Work out how much you can afford to put away each month, without stretching your finances too far.
Step 4: Save or Invest?
You’re then faced with two options; to save or invest? With saving, the money you put a way will accumulate and you will likely receive a small percentage of your savings as interest. It is generally considered that there is little risk with saving and, as a result, it may take you longer to reach your goal.
Investing, on the other hand, involves putting your money into an investment vehicle — like stocks, shares, bonds or property, to name a few — with the aim of making a financial gain. A greater risk is involved, although you could potentially reach your goal quicker, providing your investment pays off.
It’s important to choose the right option in order to correctly support the potential growth of your funds. If you choose to save, Individual Savings Accounts (ISAs) are a popular choice, as they offer a tax-free way to save. This means you won’t pay any tax on the interest your account generates.
Stocks and shares ISAs are another option if you would like to invest. They are a way for you to put significant amounts of money aside and invest it in bonds, property or stocks and shares. This means you could get out more than you pay in, although you may get back less than you invest.
Of course, you should also be considering putting money towards your pension, as part of a long-term investment strategy.
The golden rule is to always choose the best investment option for you. This should be in-line with your goals, the level of return you would like to receive and understanding the associated level of risk.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Tax rules can change at any time.