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Money & Happiness pt.1: Starting with nothing

For financial professionals only

To celebrate our partnership with the Initiative for Financial Wellbeing (IFW), and in support of the ‘Making Happiness Pay’ theme for their 2021 conference, we’ve been exploring the relationship between money and happiness and how it changes across a lifetime.

Put simply, financial wellbeing is the study and application of how money can be used to increase happiness and fulfilment. In this three-part series, we’ll discuss what that means for people who’re just starting out, those on the path to fulfilment and those looking to life beyond work.

Starting with nothing

Many young people who, later in life, will take financial advice are starting their careers deep in debt.  The average student loan debt among the cohort of borrowers who finished their courses in 2019 was £40,000. The total of outstanding student loans is rising fast with the latest reported figure in excess of £140bn. What does this mean for the financial wellbeing of the young – and will it condition their thinking about money and wealth?

Source: House of Commons Library (2020) – Link

This is clearly a matter of concern for Government and social research agencies. The Department of Education’s major literature review on the impact of the student finance system on disadvantaged young people in 2019 includes thousands of pieces of research.

And the conclusions are pretty clear. Money is a barrier to people choosing to enter higher education, and a tricky subject for the young.

With limited life experience, they can struggle to see the impact of a huge life decision made while they are still a child at school.

In this context, having financial wellbeing as your starting point makes so much sense. It personalises everything around the individual.

The IFW has identified 5 key areas of financial wellbeing:

  • A clear path to identifiable objectives
  • Control of daily finances
  • Ability to cope with financial shocks
  • Having financial options
  • Clarity and security for those we leave behind

Two of these particularly stand out when considering money and happiness in those just starting out.

Control of daily finances

Getting on top of money coming in and out is the key starting point. Without budgeting skills, young people risk falling into debt dependency with potentially severe consequences. With budgeting skills – which really amount to knowing how much money you have, what you plan to spend it on, why and when, you have the opportunity to begin to save. And from here all sorts of good things flow. Pointing a young person to the personal budgeting templates in Microsoft Excel can be a great start.

Ability to cope with financial shocks

In your twenties these are likely to be disasters great and small. From a difficult landlord not returning a deposit to nasty car repair bills, or from smoking white goods to a friend’s foreign wedding or a gap in employment, a reserve fund is essential to get through unforeseen bumps in the road.  Being able to navigate these situations as a result of saving will create growing confidence in control. It might even open eyes to wider financial options.

Fast forward

The idea I most want my kids, both under 30, to get their heads around is the concept of saving for a pension – in the context of auto enrolment. Traditional wisdom states that a 15% pension contribution is the benchmark for a comfortable retirement. That means the 5% plus 3% they are saving now is not nearly enough. How do you sugar coat that pill?

My attempt was to remind them they had more fun on less money as students than they do now working 9 to 5. So why spend everything they earn? The problem with conditioning yourself to a spend it all lifestyle is you risk being unable to cope with a painful come down. Arriving at retirement with less than half the money you need to maintain an established status quo doesn’t sound like fun. And you can’t spend regret. Save more, sooner, and retire sooner.

Has my argument worked? What do you think!

Other articles in this series

Money & Happiness pt.2: Having something to lose ➜

Money & Happiness pt.3: Having it all ➜