How to cope if you haven’t got rich parents

Emma-Lou Montgomery
Emma-Lou Montgomery
Fidelity Personal Investing3 November 2017

There’s really no way to sugar-coat this, so I’ll just say it. If you’re under 35 you’re probably finding life financially tough right now.

Times are tough. But there’s also some good news too, because it means that your financial future is firmly in your hands.

A quick read of a BBC article1 written by Andrew Hood, a senior research economist at the Institute of Fiscal Studies (IFS), and you’d think that unless you’ve got mega rich parents, it’s essentially game over when it comes to how successful you are financially.

You can certainly blame the financial crisis of 2008 for the fact that you’re the first generation (since at least the Second World War) not to start your working lives with higher incomes than the generation or two before you.

It’s also true that if you’re under 35 you’re much less likely to own your own home and therefore more likely to find yourself trapped in a cycle of ever-increasing rent rises. You’ll also be on the receiving end of a less generous pension than your counterparts from a couple of generations ago, who were treated to generous final salary schemes that are going the way of the now extinct dodo. And - to cap it all - your parents are more than likely out there, right now, blowing what should, by rights, be your inheritance.

Now for the good news.

“Good news?” I hear you shout in disbelief. But yes, there is good news. The fact is, you’re young, you have time on your side and you’re also perfectly placed to make the most of having financial control of your future placed firmly in your hands.

No silver spoon? No problem

If you don’t have rich parents, there’s only one thing for it - you’re just going to have to do it for yourself. Here’s how:

Start the savings habit today

The fact is that the younger you are when you start saving, the longer your money will have to grow. And in all three scenarios, of course you would be better off than someone who had stayed in cash over the past 10, 20 or 30 years.

There’s also no need to sacrifice great sums or be put off investing because you think it’s only for high rollers. Drip-feeding money into the stock market makes it manageable from a financial point of view, yet it also allows you to benefit from pound/cost averaging, so you buy more when prices are lower and it sets up the saving/investing habit that should secure you a strong financial future.

If you had invested £100 a month in the FTSE All Share index over the past 10 years and reinvested the dividends you’d received, you would now be sitting on a pot worth £18,9772. Although please remember past performance is not a reliable indicator of future returns.

Over 20 years the benefits of long-term investing are even starker. In this scenario, if you had reinvested your dividends your pot would have grown to £50,8113.

But the true power of compounding is realised over the long term. Over 30 years, with the dividends reinvested you would be sitting on a pot of money worth a whopping £143,4434.

If that £100 figure is too much, don’t be put off. You can save as little as £50 a month and by holding it in a stocks & shares ISA you also keep the tax man’s mitts off your money.

Seize the day

With the time horizons you have (and bear in mind that you might need this money at various stages of life) it’s far better to invest that money. One thing strongly in favour of investing, rather than saving in cash, is the benefit of time.

For example, assuming annual growth of 5%, if you were to invest a single lump sum of £1,000 at the age of 22, by the time you were 70 you would have £10,400. But, if you were to wait 20 years, until you were 42, to make that same one-off lump sum investment it would only be worth £3,900 by the time you were 70.

Yes, it’s higher risk because there is a possibility that you will lose money if the market goes against you, but if you can invest that money into the stock market and leave it there for 10 to 15 years, or more, then the lumps and bumps that hit the stock market now and again, should be sufficiently smoothed out.

Use your ISA allowance

It’s important to get your money working as hard for you as possible, so make sure that you use your annual ISA allowance. ISAs are a tax-efficient way to get your money growing; ensuring more profits go into your pockets.  You can invest in a range of funds within your ISA, so whether you want to keep your money in bonds, dip into emerging markets or take a truly global approach, check out our Select 50 for fund ideas.

Get your pension underway

You’re never too young to start planning for your retirement. It might be decades away, but that’s exactly when you want to start saving. The longer you leave your money invested, the better. So use youth to your advantage and start investing now.

Auto-enrolment is a government initiative designed to make joining a company scheme easier. And joining your company’s pension plan is a no-brainer, especially if your employer contributes to your pension pot. Think of the money they pay in as a pay rise. OK, you might not be able to get your hands on it until you’re 55 at least, but remember this is money they’re giving you on top of your salary.

If you’re self-employed or not eligible to join a company scheme then opening a personal pension or a SIPP is a good way of utilising the valuable tax perks that come when you save into a pension. HM Revenue & Customs will top-up your contributions at your basic rate of tax. This means you only have to make contributions of £2,880 a year to have a total of £3,600 added to your pension pot.

Start following these steps now and you’ll take back financial control. Because the truth is, you don’t need rich parents to be financially secure.

Five year performance

(%)

As at 2 Nov

2012-2013

2013-2014

2014-2015

2015-2016

2016-2017

 FTSE All-Share

21.0

1.0

3.1

10.6

15.9

Past performance is not a reliable indicator of future returns

Source: Datastream from 2.11.12 to 2.11.17 total returns

Sources:

1 http://www.bbc.co.uk/news/uk-39519844

2 Fidelity International, July 2017.  Based on £100 a month invested between 30.6.07 to 30.6.17. Figures for dividends reinvested based on FTSE ALL Share - Total Return as at 30.6.17. Figures for dividends not reinvested based on FTSE ALL Share – Price Index as at 3.6.17.

3 Fidelity International, July 2017.   Based on £100 a month invested between 30.6.97 to 30.6.17. Figures for dividends reinvested based on FTSE ALL Share - Total Return as at 30.6.17. Figures for dividends not reinvested based on FTSE ALL Share – Price Index as at 30.6.17.

4 Fidelity International, July 2017.  Based on £100 a month invested between 30.6.87 to 30.6.17. Figures for dividends reinvested based on FTSE ALL Share - Total Return as at 30.6.17. Figures for dividends not reinvested based on FTSE ALL Share – Price Index as at 3.6.17.


Important Information

The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. Eligibility to invest into an ISA or SIPP and the value of tax savings depends on personal circumstances and all tax rules may change. You will not normally be able to access money held in a pension till the age of 55. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.