Far too many young people leave home without an adequate understanding of how to effectively plan their finances. As a result, they can end up taking on unnecessary risks and failing to avert poverty in old age. This guide sets out the basics of financial literacy in order to give readers an idea of the areas where they should direct their research.
Start early and keep going
The first thing to note is that when it comes to saving it’s best to start as young as possible. The effect of compound interest becomes more and more powerful as time goes on, which means that a few extra years of saving can make a large impact on the amount of money that someone has available when he or she comes to retire.
Regardless of whether you choose to invest your money in pension schemes, stocks or property, starting early will allow you to build a bigger pot. It’s also important to maintain your rate of saving throughout your working life and not allow it to drop when you start a family or a business. For this reason, it is a good habit to set aside the amount that you will save each month as the first item in that month’s expenditure before deciding what you can afford to do with the rest of your income.
The first form of saving that most people think of is the pension. Many workplaces offer pension schemes, but there are also state pension schemes and private pensions can be arranged. The different types of pension mainly fall into two broad categories:
Defined benefit schemes: These are generally workplace pensions which are based on either a worker’s final salary before he retires or his career average salary.
Defined contribution schemes: These are based on the amount that the scheme holder pays into the pension pot.
As time goes on, defined benefit schemes are becoming rarer. This is because companies are moving towards offering defined contribution pensions in an attempt to limit their liabilities.
In many countries, there are tax advantages to saving via a pension scheme. This is because governments tend to encourage their citizens to save and pensions are a simple, low-risk method of doing just that. For almost everyone, it should make sense to pay into some kind of pension scheme as part of saving for old age.
For most people, buying a home is the most expensive purchase that they will make during their lives, which can make joining the housing ladder a slightly daunting prospect. There are a number of advantages to buying your home instead of renting. Firstly, it allows you to build up your equity in an asset. This gives the owner something that they can borrow against and ultimately pass on to the next generation.
In previous decades, property across much of the world has consistently increased in value. This has led to large increases in the wealth of people who bought houses twenty or thirty years ago. In most places, house values took a tumble following the worldwide financial crisis in 2008. Dubai is unusual in that it has maintained economic growth and growth in property values during the last decade.
The buoyancy of Dubai’s property market makes it highly attractive for residents to jump onto the housing ladder as soon as they are able to afford the cost. For most people, this will involve taking out a mortgage. Mortgage lenders will seek to establish whether you have sufficient income to be able to afford to keep up repayments. In order to get the best possible deal, it is often worth holding off from taking on a mortgage for long enough to save up a larger deposit.
Off-plan property in Dubai offers a much cheaper alternative route to home ownership and can easily help you secure a home in the area of your choice. Off-plan property is property which is sold before it has been constructed. The developers typically offer highly favorable finance arrangements to off-plan buyers. This can mean that smaller deposits than usual are necessary. Before taking the plunge, it makes sense to give careful consideration to the finance plan, the area where the property is to be constructed and the degree to which infrastructure is in place to support the new development. Yzer Property has a wide range of off-plan property developments from which customers can choose.
Stocks and shares
A traditional approach to making investments is to buy stocks and shares. This can be a very high-risk activity if undertaken by a poorly informed novice trader. For most people, investments in stocks and shares take the form of unit trusts. These are actually bundles of shares in different companies that spread out the risk of investing in individual shares. If you own shares in one company and its share price falls, then you will lose your money. If you own shares in lots of companies but one falls in value, it is likely to be counterbalanced by the others. Financial advisors can give advice on which unit trusts represent a sensible investment in the current economic climate.
People who prefer a more hands-on approach can go out and choose their own shares. Anyone who is tempted by a more active trading strategy should at the very least read up on the different techniques that successful traders use to evaluate shares. These fall into two categories: technical analysis and fundamental analysis. Technical analysts look at graphs of how a share has performed in order to try to predict how it will perform in the future. Fundamental analysts look at statistics about the economy and the company to determine whether or not it is likely to increase in value.
In general, day traders, who seek to profit from short-term fluctuations in stocks’ prices, tend to use technical analysis, whereas longer term investors tend to use fundamental analysis. In practice, most professional traders will use a bit of both forms of analysis in order to get as much information as they can. For an investor who seeks to take a fairly hands-off approach, a grounding in the fundamentals of the economy and in how to value companies is very worthwhile if they want to evaluate the advice given by financial advisers.
Alternatives to buying stocks and shares directly include taking out contracts for difference (CFDs) and spread betting. These have benefits in that they offer the ability to bet on a stock’s price going down as well as up, but also entail greater risk because investors can lose more than their initial stake.
The most traditional asset that is used as an investment is gold. This is commonly used as a safe haven for money in turbulent economic times. Following the financial crisis, gold and investments that were linked to its price were a popular choice for people who were seeking a steady return on their money.
Many other less traditional assets are used as investments by people around the world. Classic cars have been a very successful investment in recent years. Jewellery, watches, antiques, vintage wine and whisky are all widely bought as investments. These niche assets require a significant amount of specialist knowledge to trade in successfully. However, they can often produce very high returns for successful investors.