This article is an excerpt from the Good Guide to First Time Investing, sponsored by impact investing specialist Triodos Bank. Download your free copy to find out how to get started with investing for good.
As Billie Eilish says, ‘I’m in love with my future.’ Problem is, at this point in time, the future looks even more uncertain than ever. So how can young people ensure their future is one that they too will love?
While there are still uncertainties about Covid-19, one thing is clear – absolutely everything has changed for young people of working age.
Much as the 2008 recession prompted so many challenges for millennials, this pandemic has done the same for Gen Z. Let’s look at those challenges.
Firstly, debt. University has of course become too expensive for many – not surprising when today’s students are graduating with average debts of around £40,000. According to the Financial Conduct Authority (FCA), people aged under 34 saw the largest increase in financial vulnerability last year.
Another challenge is entering the job market. Even before Covid-19, securing a job was pretty tough with endless internships and low starting salaries. According to the Office for National Statistics, the employment rate among those aged 16-24 saw a steep decline in 2020 compared with 2019, while their unemployment and economic inactivity rates increased.
Other financial impediments to starting to save are of course the high cost of home rental or ownership and the ever increasing cost of living.
When work is scant, debts are climbing, and cash savings have been raided, there’s virtually nothing left to invest.
Time on your side
However, there’s one upside of sorting out your finances while still young, and that’s time.
The good ole law of compound interest means any interest earned on your investments then accrues interest on itself – so the earlier you start, the more you potentially stand to gain.
Cash returns these days are almost zero, but look to the stock market, and rates of return can be much more enticing – especially when you throw compound interest into the mix.
For example, if you were able to save £285 per month from the age of 25, earning an eight per cent rate of return, by the time you reach 65 you’ll be a millionaire! Literally, your £285 per month would have grown to around £1 million. If you didn’t start saving until age 30, you’d need to save £433 per month to make that same million, and if you wait until 40, the amount you’d need to save goes up to £1,045.
What all that adds up to is the sooner you get started, the better. You certainly won’t be alone in investing for the first time. Recent research from Triodos Bank revealed that 42 percent of young people have found themselves with more money to spare from not spending as much during the pandemic, and 2.6 million young people plan to open an ISA this year with those lockdown savings.
Covid has inspired investing
The research also revealed that 40 percent of young people say the Covid crash has inspired an increased interest in investing during the coming year, with the most common reason for this being that the pandemic has made them more aware of the need to have a secure long-term financial future.
It’s easy to see how, over the course of the pandemic, offline AND online investment platforms have seen record account openings and engagement from young investors.
However, Gen Z are digital natives, whose trends start on Instagram and TikTok and whose outlooks are shaped by those platforms too. According to research from Lowell.co.uk, young people are more likely to get financial advice from non- traditional sources, with 20 per cent of young people turning to social media for money and finance advice.
But TikTok is just for silly dances, right? Wrong. By February 2021, the #moneytok tag had racked up 5.9 billion views, while the #personalfinance tag had 3.7 billion views. #Moneytok videos cover a range of financial topics, from basic budgeting through to more complex investing issues.
For all the educational benefits such videos will offer young potential investors, there are also huge risks. It’s easy to see the origin of recent investment ‘hot tips’ such as Dogecoin or Gamestop. But perhaps it’s a case of ‘you can’t lose what you don’t have’, as figures from the FCA reveal that almost half of young DIY investors do not view losing money as a potential risk of investing.
Additionally, a survey by Prudential of advised families found 74 percent of millennials and 58 per cent of Generation Z said they had seen, or were going to see, an adviser, driven by financial difficulty and wanting to start investing.
Transfer of wealth
The entire financial services sector is waking up to the realisation that the asset-rich older generation that has served them so well is getting older and beginning to transfer wealth before they die. It follows, then, that savvy financial services providers are beginning to focus their attention on younger generations instead.
So how can you make the most of these new courtiers? Perhaps don’t go lock, stock and barrel following an idea your mate sent you on TikTok. Work out what you can set aside each month – however small – and simply start there. There are even apps that do this for you, rounding up spare change from your spending and putting it to work in an investment account.
The Triodos Bank study also found that 94 percent of younger investors say they have or would switch their ISAs to an ethical provider this year.
It makes sense to seek out those financial brands whose values align with your own because, after all, investing for your own future also brings the opportunity to invest in a more sustainable world to live in.
While many investment firms are rushing to meet the rising interest in sustainable investing, the more savvy ones will understand the particular Gen Z ability to smell greenwash a mile away.
Taking your first step into investing can feel daunting, but once you’ve started you won’t look back.