Most people step into their twenties and suddenly face “regular bills” and “long-term financial plans.” Yet, according to research by Shepherds Friendly, financial literacy remains worryingly low among young adults.
In December, the mutual society quizzed 2,000 people aged 18 and above on their money knowledge. “While only 23 per cent across all age groups knew enough to pass the test, this fell to 9 per cent among those aged 18-24 and 12 per cent in the 25-34 age group.”
An accompanying survey found that “51 per cent of those aged 25-34 have difficulty managing their finances, with 46 per cent saying they lose sleep over money worries.”
Leon Ward from the financial education charity Money Ready said: “To build a financially savvy population, we need to equip people with genuine, deep-rooted knowledge. That’s how confidence becomes capability.”
Below are the core areas that can help lay the foundations for long-term financial stability.
Learn How To Budget
“It’s important to start with the basics.” According to a survey of 2,000 young adults by Santander last year, “79 per cent of people aged 18-21 have never created a budget, while 76 per cent have never paid a bill, and 77 per cent have not set aside funds for unexpected expenses.”
Andrew Hagger from the personal finance site MoneyComms said:
“Draw up a budget on paper or on your laptop and stick to it. List your income and all your regular outgoings — including your monthly savings — so you’ll be left with your ‘disposable income’. This is the money you have left over for spending.”
He warned that exceeding this amount “could mean you having to borrow and pay high interest rates.”
Hagger added:
“Don’t buy stuff you don’t need. And don’t be tempted by ‘get-rich-quick’ schemes, crypto and online gambling.”
Cryptocurrencies such as bitcoin “can seem appealing.” But they are described as “volatile, unregulated and risky.” Young adults are also urged to “think twice before turning to ‘finfluencers’ on social media platforms such as TikTok for financial tips.”
Borrow Carefully
“If you do need to borrow for an unexpected expense or a big purchase, take care to do so wisely. Remember, you’ll need to repay the money at some point.”
A “0 per cent purchase credit card” can allow spending “for a certain period without charging interest.” TSB offers “up to 26 months of interest-free spending,” while Lloyds and M&S provide “up to 25 months.”
However, borrowers must “always make at least the minimum payment each month,” as interest is charged “at a steep rate on any missed payments (24.9 per cent on the cards above).” Missed payments can also leave “a black mark on your credit record.”
Alastair Douglas from TotallyMoney said:
“Miss payments and you might struggle to get a credit card, a mortgage, or even a mobile phone contract in the future.”
Start a Savings Pot
“In your twenties, it’s likely that you are just beginning to build up some savings and keeping an emergency fund in an easy-access account is an essential part of this.”
Ian Futcher from the wealth manager Quilter said:
“This should ideally cover about six months’ worth of income, and be kept in cash, ready for unexpected situations, such as losing your job.”
The top rate on an easy-access savings account is currently “4.5 per cent from Chase Bank (although the rate drops after the first 12 months).” Many other providers offer “more than 4 per cent.” Easy-access accounts typically come with “variable rates,” meaning interest can change and may fall after introductory bonuses end.
For larger balances or longer-term savings, an Isa may be considered. Savers can “shelter up to £20,000 in these tax-free accounts each tax year.” This can be held in a cash Isa or a stocks and shares Isa.
“From April 2027 under 65s will only be able to deposit up to £12,000 in a cash Isa.”
Basic-rate taxpayers can earn “up to £1,000 a year from savings before they have to pay income tax,” while higher-rate taxpayers can earn “up to £500.” Additional-rate taxpayers “get no allowance.”
The best easy-access Isa rate stands at “4.4 per cent variable from Trading 212,” with MoneyBox paying “4.32 per cent” and Plum “4.3 per cent.” A one-year fixed option offers “up to 4.15 per cent, with Castle Trust Bank.”
Start Saving for a Deposit
“As you settle into working life, this may be the stage when you start to think about saving for a first home.” A larger deposit can “unlock better mortgage rates and more borrowing options.”
Those planning to buy soon are advised to use a mortgage calculator to assess repayments and understand how a bigger deposit may reduce costs. Longer mortgage terms may mean “lower monthly repayments,” but “you will pay more overall because there will be more time for interest to accrue.”
If under 40, savers can open a Lifetime Isa. You can “pay in up to £4,000 a year and benefit from a 25 per cent government bonus, worth up to £1,000 annually.” Funds can be used to purchase “a first home worth up to £450,000 or after you turn 60.”
However, withdrawing funds “for any other reason, or less than 12 months after you opened the account,” results in a penalty that “wipes out all of the bonus and some of your own money too.”
The Lifetime Isa “is expected to be redesigned in April 2028,” with expectations that it will focus solely on first-time buyers.
Think More About Investing
“As you get further into your twenties, it’s a great time to consider the stock market.”
Alice Haine from Evelyn Partners said:
“Investments, particularly equities, have historically delivered higher returns after inflation than cash over longer periods, albeit with some volatility in the short term.”
Investors should typically plan to invest “for at least five years to ride out any ups and downs.”
According to Evelyn Partners, £10,000 invested in global shares ten years ago via a fund tracking the MSCI All Country World index “would have £36,065 today (total return, including dividends).” By comparison, the same amount in average cash savings would be worth “£11,940.60.”
Haine said:
“Relying too heavily on cash over the long term risks missing out on the inflation-beating returns that well-diversified investments can deliver.”
Laura Suter from AJ Bell added:
“If you put away just £25 a month — less than £1 a day — you could build up a tidy pot after a few years.”
Assuming “6 per cent a year investment growth after fees,” £25 per month could grow to “nearly £1,800 after five years” and “nearly £4,200 after ten.” After 20 years, it could reach “about £11,700.”
Set Up a Pension
Most employees are automatically enrolled in a workplace pension, unless under 22 or earning below £10,000 per year.
Pensions benefit from tax relief. For example, “if you’re a basic-rate taxpayer and pay £80 into your pension, the government adds £20 in tax relief, so £100 goes into your pension pot.”
Minimum contributions stand at “5 per cent of your salary” from the employee and “3 per cent” from the employer, though many employers offer higher matching.
According to Quilter, someone starting at age 25 on £30,000 and contributing 8 per cent annually could build a pot of “about £240,000 by the time they reach 57.” With state pension added at 68, this could rise to “about £480,000.”
This assumes “annual wage growth of 3 per cent, investment fees of 0.7 per cent and growth of 5 per cent.”
Futcher said:
“For many people, their first job in their twenties marks the start of their pension savings, and this is a significant chance to grow long-term wealth in a way that saving in cash simply cannot match.”
Repaying Your Student Loan
For many in their twenties, student loan repayments are another key issue — especially after the announcement that the Plan 2 repayment threshold will be frozen “for three years until 2030.”
Plan 2 loans apply to students who started university between September 2012 and July 2023.
The repayment threshold stands at “£28,470 a year, rising to £29,385 from April,” after which it will remain frozen. Graduates repay “9 per cent of their income above this threshold.”
The freeze means graduates will “repay more as their salary rises than they would have if the thresholds were not frozen — a process called fiscal drag.”
However, making extra repayments “may not always be a good idea.”
Futcher said:
“Many lower or average earners will repay only modest amounts before the remaining balance is eventually written off after 30 years.”
He added:
“For many people, the loan effectively functions more like an income-linked tax than a traditional debt, meaning the money you may consider using to pay it off could often work harder elsewhere, such as building savings, contributing to a pension, or investing for the future.”
“The right approach for you will depend on your circumstances — and needs to be considered very carefully.”
