Apart from realising that you won’t be raking in the big bucks immediately after graduating, being in your 20s is still a good time to start building your wealth.
After entering the world of work, you will likely have access to a constant flow of income. But how can you dispense this income in a way that allows you to meet your financial commitments and still enjoy your life?
“Did I have money to do anything in my 20s?” asks Riaan Strydom, portfolio manager at PSG Wealth Port Elizabeth. A fair question given 20-somethings often find that the bulk of their income goes towards new expenses they inherit once they enter the working world.
Once you’ve paid rent and living expenses, medical aid, car instalments and possibly the instalment on your student loan, what should you do with the remainder of your salary (if there’s anything left)?
Financial advisers are unanimous in saying that saving tops the list of things to prioritise.
Even if you can’t start big, at least start saving as early as possible, says Strydom. Once you start earning a salary, set a goal to allocate a portion of your salary towards your savings, and then adjust that as your salary increases. This is useful because in your 20s your salary increases are likely to grow faster than the rate of inflation, adds Karin Muller, head of growth market solutions at Sanlam Personal Finance.
Establishing a habit of “paying yourself first” becomes easier to do over time, says Muller. Candidate attorney Ildiko Gyarmati (24) uses this method as a savings tool and transfers a portion of her income to an investment account, she says. Unit trusts and tax-free savings accounts are also good savings vehicles for future goals, says Muller.
If you delay saving, it might become harder to start at a later stage once a need arises, says Desiré Engelbrecht, financial planner at Consolidated Financial Planning. Setting goals for yourself such as building up a deposit for a house, future travels, or furthering your education could help incentivise saving behaviour.
Priya Gopal (24), who has been working in the banking industry for the past two years, agrees and has been saving towards “major future expenses” such as a house, a possible wedding and international leisure travel. Gopal’s saving habits means she has immediate access to funds in the case of emergency, she tells finweek.
Save to build up an emergency fund which is three to six times your salary, says Muller. Saving half a year’s worth of money may seem like a lot, but “life happens” and you don’t want to have to create debt when there’s a crisis like a burst geyser or a car that needs fixing.
Saving early will also make it easier to achieve your retirement and investment goals, says Strydom. In your 20s you have time on your side, which means you can reap the benefits of compound interest, says Muller.
Someone who saves R1000 every month from the age of 20 until the age of 30, and then leaves the investment to grow at an annual rate of 12% until the age of 60, will earn R5m more in returns than someone who starts saving and investing R1000 monthly from the age of 30 until the age of 60, explains Strydom. This is without considering adjustments such as salary increases and bonuses.
Secondly, in your 20s risk planning is essential, given the risky behaviour of young people, says Strydom. “You have your whole life and career ahead of you. Your biggest asset is your ability to generate income for the rest of your life.”
You need to protect yourself against the risk of disability and injury, he says. Having risk cover is essential if something should happen where you can’t continue providing for yourself and still have living expenses to cover, says Muller. “You are financially dependent on you.”
Risk cover is also essential if you have other financial obligations, like family responsibilities. Consider life insurance only if you have dependents that need to be financially protected in the event of your death, says Muller.
When it comes to making big investments, such as purchasing a home, having a good credit record is useful to prove your creditworthiness. However, Strydom cautions that taking on debt requires responsibility and discipline. If you have a credit card, make sure it has a low credit limit and that you pay it off timeously.
Always remember when you buy something on credit, you are paying more for it than the price stated on the item due to interest rate charges, says Muller.
Make sure to meet your payment obligations and do not delay payment. Don’t spend money on something if you can’t pay for it in cash, says Muller.
You shouldn’t buy on credit if you don’t believe you can make the payment at a later stage, says Engelbrecht. Pay more than what the minimum amount stipulates.
Debit order contributions are also useful in building a credit record. Make sure you have sufficient funds for them. Also check your own credit record, which is accessible once a year, free of charge.
1. Have a budget: This allows you to see what you are spending your money on and how much you are saving. Keeping track of your expenses will highlight if you are overspending and living beyond your means, says Strydom.
2. Cut costs: Once you identify where you have been overspending, prioritise your costs. One way could be to adopt a healthy lifestyle. Quitting smoking or going to the gym could bring down the premiums of your life cover, says Strydom.
3. Understand your employment benefits: Instead of blindly filling in forms at your new place of employment, ask questions and make sure you understand what you are agreeing to, says Muller. You are making important decisions about how your pension will be invested; this will determine your retirement outcome.
4. Get a financial adviser: A professional will give guidance on what you should prioritise and how to allocate your funds. Find a financial adviser you can trust and build a relationship that grows as you grow from a saver to an investor, says Strydom.
5. Educate yourself: Learn as much as you can, says Muller. Financial decisions are going to be with you throughout your working life, so make sure you educate yourself about them.
Angela de Loureiro (25) follows financial publications and does “lots of googling” to equip herself with financial know-how. Try subscribing to financial newsletters and financial literacy programmes available online.
This article originally appeared in the 28 January 2016 edition of finweek. Buy and download the magazine here.