Ben Carlson - Invest Your Way to Financial Freedom: A Simple Guide to Everything You Need to Know

Invest Your Way to Financial Freedom

A simple guide to everything you need to know

Ben Carlson and Robin Powell

Contents

Introduction: Are you ready to climb a mountain?

W ere not going to waste any time here. Lets cut straight to the chase: most young people today are living under an illusion .

This isnt a new phenomenon. Young people have always been susceptible to it and probably always will be. But, as well explain, its an illusion that will have far more serious consequences for people in their 20s and early 30s today than it had for their parents or g randparents.

What, then, is the illusion were r eferring to?

Its the illusion that money doesnt matter; that its something only older people need to worry about; that things are bound to work out in the end; and that lifes too short not to spend money in the here and now on whatever it is you want.

Dont get us wrong. Both of your authors may be long past the first flush of youth, but weve been there too. Youth should be embraced. Its one of the luxuries of being young that you can afford to dream, and to think about things other than work, money and respo nsibilities.

But dreams should be tempered with harsh reality. Money is important and it requires your focus now . Indeed, the earlier in life you focus on it, the less likely you are to worry about it in the ye ars to come.

Marketing professor, author and blogger Scott Galloway sums it up like this:

Successful people often unwittingly head-fake young people with the humblebrags of follow your passion and dont think about money. This is (mostly) bullshit. Achieving economic security requires hard work, talent, and a tremendous amount of focus on money. Yes, some peoples genius will be a tsunami that overwhelms a lack of focus and discipline. Assume you are not that person.

This book is intended to encourage, inspire and empower you; not leave you feeling anxious. Were going to show you simple rules to set you on the path to financ ial freedom.

We define financial freedom as being able to live the life you want without having to work for money to someone elses timetable and without having to rely on luck, or others generosity.

Were not going to pretend that any of this stuff is easy or that it doesnt require discipline and sacrifice. Young people today have a mountain to climb if they want to be as wealthy as th eir parents.

Well start by exp laining why.

The bad news

In the great scheme of things, people born in Britain since the start of the 20th century have been, at least in a financial sense, extraordinarily fortunate. But some generations have been more fortunate than others.

Yes, there was the little matter of world wars, but assuming you survived those, the post-war years saw a steady improvement in living standards. Take Robins family, for example. His grandparents enjoyed the comparative luxury of council housing, the new National Health Service and a fairly generous state pension. Those in the next generation the so-called baby boomers were even luckier, with most people owning their own home and foreign holidays becomin g the norm.

Robin is from Generation X, which has arguably been the most fortunate of all. Not only did living standards keep on rising, but the state continued to provide a safety net, as well as free grants for school leavers to go to university.

Ben is one of the older members of Generation Y, often called millennials, and for that cohort, financial independence will be harder to achieve. It will be harder still for Generation Z those born from the mid-to-late 19 90s onwards.

So, what happened? Why were the baby boomers so much more secure financially than many of those entering the world of work today are ever l ikely to be?

Less generous pensions

Perhaps the most important factor is that pension provision for older generations was rather more substantial than it is today. Most workplace pension schemes in the past were defined benefit (DB) schemes; in other words, you were guaranteed to be paid an agreed percentage of your final salary, or your average career salary, in retirement.

Nowadays, however, almost all pensions are defined contribution (DC) schemes; in other words, the employee and employer agree to contribute a certain amount to the scheme, but the value of the pension pot goes up and down depending on how the underlying investme nts perform.

In short, DC schemes are much less generous than DB schemes. Its true that, as things stand, everyone with a total of 30 qualifying years of National Insurance contributions or credits is also entitled to a basic State Pension. But the State Pension is only a relatively small amount 179.60 per week in 2021 and theres no guarantee that there will even be a State Pension in the future.

Asset price boom

Another reason why young people face an uphill struggle financially is precisely the same reason why older generations have had it so good. Simply put, asset prices h ave boomed.

Houses, in particular, are far less affordable for first-time buyers today than they were for previous generations. In the 2010s alone, UK property prices rose by more than 40%, while most global stock markets doubled in value. Why? Largely because of Quantitative Easing a policy adopted by central banks in response to the global financial crisis of 20079, to keep interest rates low and fuel the economy.

This boom in asset prices naturally benefited those invested in the property and stock markets, but it made both of those markets much more expensive for new, younger investors to buy into.

Slowing salary growth

A final reason why young people today are at a financial disadvantage compared to their parents and grandparents is that salaries, in real terms, have fallen in re cent years.

A survey published by the Institute of Fiscal Studies in October 2019 found that those born in the 1980s have income that is no higher in their early 30s than did those born ten years before and this is the first time since (at least) the Second World War that that ha s happened.

Since then, of course, we have witnessed a global pandemic. A report by the Resolution Foundation published in March 2021 warned that, as a result of the coronavirus, many young people are at risk of pay scarring in the y ears ahead.

Traditionally, people tend to move jobs more frequently early in their careers, boosting their pay as a result. But, researchers found that annual pay growth for those aged 1824 fell from 12% in 2019 to 6% in 2020. Among those aged 2534, it fell from 5% to 1%. This deterioration in pay, the report warned, comes on top of the fact that younger workers are more likely to have been affected by furloughing and job losses.

The combined effect of less generous pensions, missing out on the asset price boom and stagnating wage growth has had a huge impact. Consequently, young people will probably need to make bigger sacrifices than previous generations to become financially independent.

But enough of the bad news. There are still plenty of reasons to be cheerful.

The good news

Inheriting wealth

This certainly wont apply to everyone, but a saving grace for many millennials will come in the form of an inheritance. According to a survey by Hargreaves Lansdown in May 2020, young and middle-aged people are more likely than over-55s to expect a generous bequest. Around 22% of those aged 1834 and 23% of those aged 3554 said they expect a large inheritance.