Inv -Young Adults- Ian Mckeever & Co.

This page is about which investments are generally most suitable for young adults. Financial objectives are bound to be short term, such as saving for weddings, setting up home and having children. However, as someone who was very serious as a young man I strongly recommend that you also invest in yourself and invest in big experiences rather than little ones.

Although this is an ideal time to start investing in your pension most people in this age group have much shorter-term objectives such a getting on the housing ladder. If you do have the money to invest in personal pensions you should consider a high-risk high-return strategy. In most cases the spare cash will not be available. However if you can join a company pension scheme to which the employer also contributes you should seriously consider joining even if it involves short-term sacrifices. If free money is on offer you need a good reason not to take it.

Given the short-term time horizons, investments need to be simple and flexible.

The number one rule is “do not get into debt”. The only debt you should have might be debts from student loans. Life will get serious in time and you do not want to be saddled with debt when that happens. You should be saving and investing possibly in yourself but if you are getting into debt you are storing up trouble.

1) Take out a cash ISA. Interest is tax free even if you take the money out next year you will still have got one year’s interest tax-free. Interest rates are competitive. Read the press or explore the Internet to find the best deals.

2) Most building societies offer enhanced interest rates on regular saving plans, use them. The great enemy of saving is inertia. By setting up a direct debit or standing order the money is saved without you having to do anything. What requires positive action is withdrawing the money. Generally one withdrawal a year is allowed without penalty and so to add flexibility open more than one.

3) Take out an equity/Bond ISA but invest in short bonds where any rise in interest rates will cause capital losses that relatively small and temporary. However most funds make an initial charge and so unless the you plan to hold the funds for at least 3 years the initial charges will absorb the benefit of the tax relief.

4) If you are a high rate taxpayer think of Index Linked Savings Certificates. They provide against inflation taking off and the proceeds are tax-free. If you can get 6% on a deposit a higher rate tax payer will end up with net interest of 3.6%. As at the time of writing (July 08) Index linked Savings Certificates give 1% over inflation that mean that if inflation exceeds 2.6% it beats the deposit account. For a basic rate taxpayer the deposit deposit account would give 4.8% net of tax and inflation has to exceed 3.8% to beat it.

Identify your short-term financial objectives. Once they are achieved you can afford to invest some money for the long term, say the next ten years. Consider making regular investments in the stock market by paying a fixed sum each month into a regular savings. Equity prices are particularly volatile and expect short term capital losses but if you can afford to take a ten year view the immediate effect will that you will on average you will be buying shares at less than average value. It will also serve as practical education in what can happen to investments and help you make more informed decisions in the future.

If your personal future looks bright and you have the cash investment in personal pensions is extremely tax efficient and your long time horizon will enable you to take greater risks and hopefully achieve higher returns in the long run. However in most cases shorter-term objectives will take priority and this means the sort of flexibility that pension plans cannot offer.