As a young adult, what can I be doing with my excess income?

Question

I am a 20 year old living in the UK. I've had a look at my monthly incomings/outgoing and have realised I have approx £400-600 (~$600-$900) to spare per month, and that at the minute I'm just squandering it for the most part.

I have a relatively loose grasp on investing (at about the level of an 'Investing for Dummies' book I read a year ago) and I have a foggy idea of what I should be doing with this money short term but I have no idea what to do long term.

Currently I am renting a property with my girlfriend. I also have approx. £6000 in debt in the form of a car loan. I figure my priorities should either be saving the 10% deposit for a mortgage so that I am not pouring my cash into a landlords pocket. I should pay off the car loan & I should save an emergency fund equaling about 3-6 months worth of wages (or living expenses I guess?)

The problem I face is that I have no idea which of these should take precedence, and I have no idea what I should be preparing to do after I achieve these goals. Is there anything else I should be doing short term, or planning long-term?

I guess what I am here looking for is general advice on what people more experienced than myself would do, particularly in prioritising short-term goals and what I should be thinking about long-term.

Answer 1

I also have approx. £6000 in debt

Just a note: you're guaranteed to get a return on whatever debt you pay off quickly. Even if your debt is only 2%, you get a guaranteed return of 2% - which is higher than most of the savings here in the US (not sure about the UK).

You mention saving for a house, which is also a good idea, but with debt, I'd recommend eliminating that if you're paying any interest at all. This won't be popular to write, but markets are high right now, so even though you may feel that you're missing out, the return on paying off debt is guaranteed; markets aren't.

Answer 2

If I were you I would just save the money until I had at least 5000 pounds to keep as an emergency fund. There are various kinds of unexpected events and it is smart to have some cash in case a problem comes up.

Next time I would recommend buying a car you can afford. Borrowing money to buy nice things is the enemy of wealth accumulation. Also, when you buy a car for cash you will get a much better deal than when you let a dealer put his foot on your neck.

Answer 3

1. Get rid of debt.
2. Save up for at least one-month of expenses. That gives you a good pillow in case of any emergency, or job loss, or anything else. Then slowly start saving for 3-6 months.
3. In Canada we have RRSP (Registered Retirement Savings Plan), which are tax-deductible. Ideally people try to put at least 10% into those, which creates a baseline for a safe retirement. Not sure about UK, but in Canada you can use your RRSP funds to get an interest free loan to buy your first property, which you have to pay off within 15 years. Find that out.
4. Still have some money left? Pay off your car, if interest is high. Save up more for the house. Open TFSA (Tax Free Savings Account), and use it to invest into Mutual funds.
5. Lastly, and most importantly - start reading a lot of blogs, some highly rated personal finance books. Talk to some people who you consider financially successful, and fit into your financial category, meaning don't get an advice from a millionaire who inherited his wealth, about finances.

This is all very basic and general advice, that works for most, but not all. You are unique with your own special needs and desires. Good luck!

P.S.: not exactly related to your question, but when you get more familiar with investing and utilizing your money, find more ways to save more. For example, change phone plan, cut the cable, home made food in bulk, etc.

Answer 4

You apparently assume that pouring money into a landlord's pocket is a bad thing. Not necessarily. Whether it makes sense to purchase your own home or to live in a rental property varies based on the market prices and rents of properties. In the long term, real estate prices closely follow inflation. However, in some areas it may be possible that real estate prices have increased by more than inflation in the past, say, 10 years. This may mean that some (stupid) people assume that real estate prices continue to appreciate at this rate in the future. The price of real estates when compared to rents may become unrealistically high so that the rental yield becomes low, and the only reasonable way of obtaining money from real estate investments is price appreciation continuing. No, it will not continue forever.

Furthermore, an individual real estate is a very poorly diversified investment. And a very risky investment, too: a mold problem can destroy the entire value of your investment, if you invest in only one property. Real estates are commonly said to be less risky than stocks, but this applies only to large real estate portfolios when compared with large stock portfolios. It is easier to build a large stock portfolio with a small amount of money to invest when compared to building a large real estate portfolio.

Thus, I would consider this: how much return are you going to get (by not needing to pay rent, but needing to pay some minor maintenance costs) when purchasing your own home? How much does the home cost? What is the annual return on the investment? Is it larger than smaller when compared to investing the same amount of money in the stock market? As I said, an individual house is a more risky investment than a well-diversified stock portfolio. Thus, if a well-diversified stock portfolio yields 8% annually, I would demand 10% return from an individual house before considering to move my money from stocks to a house.