Make the most of your youth

The first of a five-part exploration of financial planning through the ages of life; Credit cards are fine so long as you pay the bills. But they are an expensive way to borrow; If you stop your payments after a few years, the charges may soak up most of the contributions

"HOPE I die before I get old," sung by the Who's Roger Daltrey with such apparent conviction, may ring a bell with many twentysomethings. Who wants to even think about pensions before hitting middle age? But the young generation are now "talking 'bout" whether they can ever afford early retirement. Unless you are a rock star or pinball wizard, the sooner you start financial planning the better.

Good financial planning involves minimising the amount of money you give away to banks, insurers and the Inland Revenue and maximising the return on each pound you earn. It also means, and this is the tricky part, reconciling the money you have actually got with the amount you need or would like to spend, both now and in the future.

For many people, particularly in their early twenties, this gap between income and outgoings can seem a chasm. The joy of getting paid a regular income for the first time can be marred by most employers' idea of what constitutes an acceptable salary.

Whatever your finances, the main priorities are:

q Set a budget. Checking that your income will meet all essential outgoings may sound a waste of time until you get evicted by your landlord or your bank refuses to cash a cheque. If you are in deep financial waters, ask your local Citizens' Advice Bureau for specialist debt advice - it can negotiate with lenders and utility companies on your behalf and advise on housing and other benefits. Avoid loan sharks at all costs.

q Cut borrowing costs. Credit cards are fine so long as you pay the bill each month. But, in general they are an expensive way to borrow money. Store cards tend to be worse. Cheaper options include bank and building society personal loans.

Beware if you are borrowing on overdraft. If you have got a bank account that does not charge regular fees for overdrafts agreed in advance, fine - banks and building societies that fall into this virtuous category include Abbey National, Alliance & Leicester, First Direct, the Halifax, Nationwide and the Woolwich. But most banks charge hefty fees on top of interest, every time you go overdrawn. The solution is to switch to an account with a cheap overdraft facility or to borrow in another way.

q Use your bargaining power. This particularly applies if you decide to get a mortgage. Lenders are desperate to drum up new business and there is a stack of offers for first-time buyers. But be wary of the myriad catches, which can include punitive penalties if you want to switch to another lender later on, and requirements to buy poor-value house or other insurance as part of the mortgage package.

q Build up an emergency fund. There is no financial point in saving until you have paid off any debts since you will almost certainly pay far more for borrowing than you will get paid on your savings. Once you have funds to spare, the first priority is to build up an instant-access savings fund for emergencies and other essentials such as holidays. It is well worth shopping around for a good rate of interest. Postal accounts run by societies can offer some of the best.

Nick Conyers, of Pearson Jones, the independent advisers, recommends anyone who is willing to save a regular amount, or tie up a lump sum for five years, to consider a Tessa. This is essentially a deposit account where the interest is paid tax-free. Current rates can be as high as 7 per cent or more, and being tax-free this 7 per cent is worth more to taxpayers than rates available on pretty much any other account where the interest is taxed. For a basic-rate taxpayer, a Tessa means in effect an extra quarter on the interest. But you must tie up your money.

q Think longer term. It is important to think about pensions, however impenetrable they may seem and however depressing. Relying on the state pension will guarantee a dramatic drop in your standard of living. Lexis, a firm of pension advisers, says: "Starting contributions as early as possible and as high as possible will result in an overall lower cost to achieve a target pension." If your employer offers a pension scheme, Lexis believes it is usually worth joining it, since you then benefit from contributions made by your employer as well as the many tax benefits on pensions. The catch comes if you switch employers within two years of joining the scheme - typically the scheme will refund your contributions (but not your former employer's), which will then be taxed at 20 per cent.

If you are self-employed or your employer does not offer a company pension scheme, you can take out a personal pension plan. But the question of whether this is a good move is much more finely balanced. True, you get tax relief on contributions, the money in your pension fund rolls up tax- free, and you can usually take some of your benefits as a tax-free lump sum on retirement. But the downside is the flexibility of the investment - or lack of it. For a start, the money is tied up until you are at least 50. Perhaps more important, many plans have very high charges. If you stop payments after a few years because, for example, you have moved to a new employer with a good company scheme, you could find those charges have soaked up most of your contributions. For this reason, IFA Mr Conyers advises: "Either choose a flexible contract with low charges, or save up until you can put a lump sum of pounds 1,000 or more into a single premium contract (a plan where you put in a yearly lump sum rather than saving monthly)."

q Save for the medium term. Historically, shares have always outperformed cash and gilts (government-issued securities) over periods of five years or so. If you can afford to save regular amounts, arrangements where your money is pooled with other people's and invested by a professional, such as unit and investment trusts, offer the best options for long-term growth and a high degree of flexibility - you can withdraw money with no penalty. Anyone can invest up to pounds 6,000 a year in a personal equity plan, and many unit trusts come with a free PEP wrapper. This ensures the fund grows free of tax and any proceeds are also tax-free.

q Get essential insurance. As well as house contents and car cover, if you have dependants and do not have adequate cover from your employer, life insurance is vital.