Have You Started Preparing For Your Future? - The Dilemma Between Spending and Saving

 Why Do Young Adults Not Save Enough?

Do you remember the last time you transferred money to your savings account, or do you have a savings account? Savings is considered as a form of self insurance. However, young adults with low and middle income are often unwilling or unable to save money nowadays. This blog will discuss this pressing question through many potential factors that may cause it, including: different life attitudes, the constrained income and high living costs.

Note that low/middle income young adults are the protagonists in this blog. Those with high incomes and wealth make up a small proportion of the population and have the financial freedom to make purchases right now while saving for the future. The vast majority of people are not afforded this luxury, meaning they have to make a decision on what to do with their money. This is the quintessential dilemma for young adults – the trade off between spending now or saving for the future.

The Saving Trends

Young adults face a decision on when and what to spend; spending it now, saving for adulthood or retirement. Many tend to focus on today's purchases rather than the needs of the future when they may equally need it. The graph below is the combination of the current and future consumptions with an assumption of constrained income. Point A indicates their consumption preference. People face problems today and focus on the present, failing to consider the importance of facing problems in the future, as simple as having kids to feed or rent payments. Should they lose their job, they may lose their lifely income altogether and serious consequences may arise. However, young adults may have difficulties in starting an adequate savings portfolio initially.

Recent Global Financial Shocks such as COVID and the ongoing cost-of-living crisis have been proved to affect young and lower income people the hardest. Lower paid jobs tend to have less job security, meaning that in times of economic instability with high unemployment, lower income young people are disproportionately affected. Combined with the fact that young people tend to save less due to their circumstances, there is an increased chance that they will find themselves in an adverse situation due to a lack of savings. Persistent inflation increases have further raised financial pressure on many young, low-income people, and in times of financial struggle, short-term is often prioritised over long-term out of necessity.

The above graph illustrates how young people have had their incomes squeezed and can not afford the luxuries of investing or saving as a larger proportion of their income is being spent on essentials. This can be attributed to the housing crisis that much of the western world is facing recently, with older people of the same income group being much more likely to own their homes, significantly reducing their monthly outgoings, meaning they can afford to look more long-term and increase savings. Young people however often have to commit a significant amount of their income towards rent or mortgage payments, squeezing their remaining disposable income. As reported by Moneyfarm, ‘The average savings are less for younger people, and they steadily increase until the age of 50-60. They then go down post-retirement as the income typically stops altogether.’ (Moneyfarm, 2024).

Risk and Investment Preferences & Information Hunt

As outlined previously, most young-adults find themselves walking on a precarious tightrope when it comes to personal finance. While self-insurance may seem unnecessary to some, its implications for the future financial stability are profound. Self-insurance is the form of savings done without relying on external policies and may seem like the simplest form but there are alternative options.

The type of self-insurance or rather investment done usually depends on the young-adults personal risk preferences. In more detail, the investment options preferred may vary from the personal risk taking behaviour to the asymmetric information i.e., uncertainty in the market for the best investment options. Although, as reported by Bristol University, it was found from an online survey of 4,000 participants conducted by YouGov that “women and young-people tend to be more risk averse”, (Bristol University, 2024).

There are several different types of investment options for young adults such as gold, government bonds, stocks and simple savings accounts! Although, it is advised to have a diverse portfolio to spread and reduce the risk, especially for low risk takers. Unfortunately, the investment preferences of underinsured young adults often reflect their desire for short-term gains and liquidity, meaning that the investment is easy and ready to be turned back to cash and spent! Since limited resources are available, these young adults may prefer high risk and high & quick returns. While this approach can yield beneficial outcomes, it could hinder their ability to build wealth over time or even lose the initial money invested altogether.

Educating oneself about various investment options and strategies is essential for making informed decisions. Utilising online sources or seeking guidance from financial advisors and government help can give young-adults the ability to start investing with the confidence that they won’t lose their hard earned money. This is potentially a more lucrative way of insuring yourself for future financial shocks. As reported by Barnett Waddingham, you could be losing around half a million pounds if you are one of the young-adults who are putting off pension savings.

Secure Your Future!

Overall, consider having savings, because you never know what’s going to happen in the future. Events outside of your control like unemployment and financial crises could be on the horizon at any point. It is important to have a backup plan and start thinking about how comfortable you want to be after retirement. Take a step further and do the necessary research to start having sufficient savings, while making sure that you are covered by your workplace pension scheme. Remember, that pot of money will be most useful when the time comes.

Bibliography

Moneyfarm. (1 March 2024) ‘Average savings by age in the UK: How much should you be

saving?’, Moneyfarm investing 101. Available at: https://blog.moneyfarm.com/en/investing-101/average-savings-by-age-in-the-uk-how-much-should-you-be-saving/#:~:text=Some%20cultures%20have%20a%20tendency,the%20age%2

0of%2050%2D60. (Accessed 09/04/2024)

University of Bristol. (30 October 2024) ‘Women, young and old people are more risk

adverse, research finds’, University of Bristol news and features. Available at: https://www.bristol.ac.uk/news/2019/october/financial-risk-aversion.html (Accessed

12/04/2024)

The ONS. (2021) ‘Living Costs and Food Survey’, Intergenerational Foundation 2021 - The

savings squeeze. Available at: https://www.curtisbanks.co.uk/app/uploads/2022/11/IF_Savings_FINAL_3_Oct_FINAL.pdf

(Accessed 10/04/2024)