Forgive me, but I am feeling rather smug. By the end of January, I completed the three main New Year financial resolutions I had set myself. This never happens, so I’m patting myself on the back for getting out of the traps.
Rather than sit on my hands and keep telling myself I’ll do it later – see our Groundhog Day article from the weekend for more about this behavioural finance trap – I sprang into action quicker than a Greyhound at Romford.
My three financial resolutions did take some homework and careful consideration, but I’m now happy to sit back (and hopefully) reap the rewards.
Two of the three involved my private pension, and the third, trying to build a £50,000-plus pot for my young daughter by the time she reaches adulthood, with £150 a month.
One, two, three: I sprang into action like a Greyhound this year – and completed my financial resolution admin
Resolution one: Up my pension contribution
Many millennials – and I am classed as one, having been born in the mid-1980s – who are not on the property ladder, fret about this. It is probably their number one financial concern. Will I ever be able to buy a home?
That is likely to mean they are neglecting their pensions, when a couple of simple tweaks could be the difference between a comfortable retirement pot, an okay pot, or not having any decent nest egg whatsoever.
It is also commonplace for under-40s to say: ‘I don’t invest in the stock market. It is too risky.’
What they may not realise is that their pension is more than likely invested in the stock market, whether they like it or not – so bear that it mind if you’re someone under-40 who is frightened by investments, and the potential for crashes and losses.
My first resolution was a simple one, but one easily put off – to max out my pension contribution.
This was an easy start – and after some quick number crunching and a few cutbacks here and there, I realised totally doable.
But instead of number crunching and then subsequently not doing the necessary paperwork to sort, I took the plunge.
I was pushed into action after reading a matrix produced by investment house Fidelity at the end of last year.
It has devised savings milestones that people should attempt to achieve as they move along the escalator.
It has labelled it the ‘Power of Seven’ savings goals; in recognition of the fact that someone who retires at 68 needs to have saved the equivalent of seven times their annual household income in order to maintain their lifestyle into retirement.
In other words, if household income at retirement is £50,000, they should have a pension pot of at least £350,000.
To reach this Power of Seven figure, Fidelity says a saver has to squirrel away 13 per cent of their annual income for 43 years.
On that measure, I wasn’t saving enough for my retirement.
By the time you hit age 30, you should have built a pension pot worth at least your annual household income.
Another, similar, rule of thumb often cited is that the percentage of earnings workers should save is half their age from when they start saving.
I’d failed on this front, and am now making up for lost time. As I have pointed out before, you should start saving in your 20s and 30s to make life a lot easier for yourself. I speak from experience.
I have now maxed out my contributions. Some employers will double your effort. So, for example, if you pay three per cent in, they may boost it by six per cent. If you pay in five per cent and they double it to 10 per cent, that is a huge uplift.
The fact it comes out of pre-tax pay and the potential for compounding gains over time make it a no-brainer, if you can afford to do it.
If you are lucky enough to have recently got a pay rise, you should try to save at least half of that monthly – your best bet is likely to be your pension.
There are question marks over what state pension will consist of by the time under-40s reach retirement age, so it is worth getting prepared early.
Resolution two: Make my pension work harder
I realised that the default pension fund, which had been pretty solid in recent years, hence my lack of action, has had a bad performance in 2018. I am deep in negative return territory for the year.
Now, I’m not panicking about this – I won’t be alone. It was a rotten last few months of 2018 for global markets.
It will all balance out in the coming years, there will be a few in which returns will be negative – it’s about keeping calm and beavering away.
Work out if you are saving enough
You can use This is Money’s retirement calculator here.
It takes your pensions savings, your earnings and amount you are putting to one side and your attitude to risk into account.
Using projections from experts at Fidelity it looks at how big your pot could be in future and how much of your income it will replace, factoring in inflation.
What it did highlight though, is that I need to diversify.
You shouldn’t have all your eggs in one basket, and I had been lethargic with my pension.
I took solace in the fact I’m not alone.
Hardly anyone I know has looked into the funds their pension is invested in – but it means it is out of their control.
Many also had limited knowhow on how to go about changing the balance.
I decided to research all of the funds on offer, and spread the risk more.
I had a look at past performance (which is not an indicator, of course, of future performance), ongoing charges and what and where the money is invested.
I spent a few hours considering all of the options and risk balance, until I came up with a formula that I’m happier with – spread over a handful of funds.
Will it mean positive growth in the coming years? It’s hard to tell. But at least I am spreading the risk.
Don’t be frightened to take a look at what your pension is invested in.
It is vitally important to gain a foothold as early as you can to make sure you’re happy with what your money is going into – it could be a difference of thousands, or even tens of thousands, in retirement.
Gold pot: I crunched the numbers and researched many options – and instead of holding off, I took the plunge and have begun the slow pot build for my daughter
Resolution three: A pot of gold for my newborn
I’m in my early 30s and still have student debt. I went to university shortly after my 18th birthday and had no option but to borrow in order to fund my education, and living expenses, alongside two part-time jobs.
Despite going at a time when tuition fees were capped at £1,200, I still managed to run up a huge amount of student debt. I can see the light at the end of the tunnel now, but it’s been a long slog.
I want my daughter, born in November, to have a sizeable chunk of cash to help her avoid this – and whether she chooses to use it for education, learning to drive, a house deposit and/or other useful things, I will be happy in the knowledge it would have come from years of dedicated saving.
Those who listen to the This is Money podcast would have recently heard Simon Lambert and I discuss how to build a nest egg for your child. You can listen to it below:
In the last piece of the jigsaw of my financial resolutions, I have opened a Vanguard stocks and shares Isa for her.
Its Lifestrategy 100 per cent equity fund has had solid returns in the last five years, although last year wasn’t so great, and has a risk factor of five out of seven.
The beauty of this fund is that it spreads money around the world at a very low cost, as it is a passive tracker fund. This is the kind of fund that often gets mentioned as an ideal investment portfolio building block and the Lifestrategy range offers the chance to mix shares and bonds depending on how much risk you want to take. My daughter has a long investing horizon, so I’m happy to go all into shares for her.
We’ve started with a £1,000 pot, and my future wife and I are adding in £75 in each month.
Returns: Last year, the fund was in negative territory – but that comes after some bumper growth
Using a compound calculator helped drive me into action.
I crunched the sums in the early hours when my daughter was a few days old, and asleep on my lap, and mum was upstairs getting some much needed rest.
Assuming a five per cent annual return , the pot could be worth £54,000 by the time she is 18 – or £69,000 if we hold off until she is 21.
A lower two per cent interest, we’re still talking £40,000 or £48,500 over the same time frame. A bumper 10 per cent? We’re talking £92,000 or £129,000.
Use our new compounding interest calculator tool – it could inspire you to get out of the traps.