If you have recently graduated and are starting your first paid job, or if you have been accepted for an apprenticeship and you are being paid while studying, your first pay packet can feel like an exciting time.
This is the start of your journey on the career ladder where your earnings are likely to increase over time as your skills improve.
As a young person or mature student starting a new job, it can feel daunting to have so many bills and outgoings to pay while also trying to save and plan financially for the future.
Here are some tips on how to make the most of your first pay packet and use your money wisely to increase your financial freedom.
At first look back at the first couple of months of spending and work out what you’re going to need to pay for. This might include a clothing Budget Meals at work, a car costs or the cost of commuting and a train for dry cleaning, and any other costs associated with the world of work. If you’ve moved out from home, there will be different bills to pay, it’s a good idea to set up a spreadsheet, so that you can look at all the different expenses and work out what your outgoings will be each month.
Set up a budget
“I remember going into a shop and feeling as though I never had as had so much money in my life when I was first paid,” says Chanelle Pattinson DipPFS, an Independent Financial Adviser with P&P Invest. “In hindsight, it was not really very much, but it felt a lot at the time.”
She advises putting together a budget to manage your money and quantify your income and outgoings every month.
“Try to include small expenses like Spotify, because although it doesn’t sound a lot, in fact £10 pounds a month, when there are 10 small items, soon mounts up when that money is leaving your account every month.”
Don’t forget to budget for going out and having fun, especially as you will still want to socialise and network.
“Fun is often where people fall down with their budget,” she says. “They don’t stick to that budget because they haven’t allowed themselves any money for going out or enjoying themselves. When you are in your first job, you’ve just come out of university or college and you still want to be living your life.”
Once you’ve got the budgeting and spreadsheet set up there are lots of apps that will keep track of your spending and bills. They will help you work out your income and expenditure and your monthly costs.
When you are budgeting, she suggests putting asie 50% of your monthly income aside for bills, if you can, then 20 to 30% for fun. And then the remaining 20 to 30% on saving and investing.
Set up an emergency fund
First of all you need to set up your budget, then you can start saving toward an emergency fund. This is a cash fund which you can access quickly if you need it. An emergency fund will save you having to borrow money at expensive rates if your car or washing machine breaks down, or if you lose your job or are unable to work. It should cover three to six months’ worth of household bills and expenditure.
“Once you have an emergency fund set up you can start to save towards your future investments,” she says. “I say to clients to split your investments between a pension, and an Individual Savings Account (ISA), as they both have advantages.”
Join your workplace pension
If there is a workplace pension, you should join as soon as possible.
“If you are employed, and you have the opportunity to auto-enrol into a workplace pension scheme then that’s a really good idea,” she says. “This is because you will receive the employer’s contribution which is effectively free money, and you will receive tax relief from the government, and then you will also be making your own contribution.
“If you’re fresh out of uni, even a small amount invested in your pension will put you ahead of the game. For example, £100 pounds a month now in 40 years will give you a great pension.”
Think about investing for the future
An Individual Savings Account (ISA) does not give tax relief on your contributions but does protect your money from income tax and capital gains tax once it is within your ISA wrapper.
If you do need to take money out in the future – for example for a house deposit – you can take out of your ISA. By contrast your pension fund is not accessible under the current rules until you are age 55.
“Anything you can contribute to a pension and ISA is better than nothing,” she says. “If you can only afford £50 a month that’s great. Many of my clients are in their 20s and 30s and they’re saving up for a house deposit. They split their investments between a pension and saving for a house.”
Start a pension – even if you are in your 20s
Keith Humphrey, chief executive of Leeds-headquartered Workplace Pensions Direct, says pensions are rarely at the top of people’s priority list.
“The fact that pensions and ‘retirement planning’ often fall into the same strand of conversation doesn’t help either, particularly when people feel like they don’t have enough disposable income for the life they’re living right now – let alone a chapter of their life which lies decades away!” he says.
But the UK has an ageing population. In 2014, the average age of UK residents exceeded 40 for the first time ever, and by 2040, it’s expected that 1 in 7 people will be over 75. The ratio of people in work versus those in retirement will have therefore shifted from 6:1 in 1990, to 2:1 by 2030. This means that, in less than 10 years’ time, 1.9 people in work will need to support every 1 person retired.
“The guaranteed final salary pension schemes enjoyed by previous generations, either no longer exist or are far less generous when they do,” he explains.
A 2021 report published by Interactive Investor & LCP – Is 12% the new 8%? – highlighted that long-range forecasts for real returns on pension fund investments, are falling. Workers must therefore now contribute a staggering 50% more to achieve the same predicted amount when they retire, compared to a decade ago.
e.g. a typical employee on average pay, who puts 8% into their pension pot from the age of 22, would now receive a forecast of £85,000 on retirement (based on 2017 growth assumptions). However, a 22-year-old who started work ten years earlier in 2007, would have a projected retirement pot of £131,000 – that’s £46,000 more.
“People are therefore going to be faced with the increasingly difficult – and unexpected – situation that, when they retire, their income will be significantly less than anticipated. And considering they’re likely to live longer, this will have a considerable impact on their quality of life,” he says.
- It’s always a good idea to start with a budget, and when you’ve mastered that, you’re in a good position to build up an emergency fund.
- Once you’re in the world of work, and your salary starts to increase, you’re in a great position to invest, as you have got the basics right,
- As an accountant, if you want to set up your own practice or become self employed, then being personally financially secure and having a pension and savings behind you gives you the freedom to leave a paid job, and set up on your own.
- Start with a budget so you are in control with your income and outgoings
- Make the most of workplace pensions as this can be a valuable way to start building a retirement fund as soon as you start work.
- Use a combination of ISAs and pension contributions to retain financial flexibility.
- Early contributions do not have to be large, but regular contributions will set up your personal finances for life.
- An ISA can give you flexibility and can be used alongside a pension for future financial security.
- Start a pension as soon as you start work.
Marianne Curphey is an award-winning financial writer and columnist, and author of the book How Money Works. She worked as City Editor at The Guardian, deputy editor of Guardian online, and has worked for The Times, Telegraph and BBC.