However as you mature and get older you might begin to make more serious commitments like getting married, starting a family or purchasing your first home.
The financial decisions you make in your 20’s will have a material impact on your financial future
1. Don’t max out your credit to buy a car
For many people starting work the opportunity to buy the car of their dreams is too big to resist and car dealers are only too happy to help them max out their credit lines. It is only after a couple of months of driving the car that you realise that the car is basically unaffordable.
The monthly instalment is only half of the cost of keeping the car on the road and first time car owners don’t always budget for insurance, petrol and general running costs. At this stage the new car owner also realises that they cannot sell the car for what they owe to the bank.
A car devalues the minute you drive it out of the dealership and if you financed the car over six years, you will owe more money on the car than it is worth for the first four years!
Car finance is also the number one reason people are turned down for home loans as they have no more credit capacity for a mortgage.
Action: Save up a deposit, budget for insurance and petrol and only finance the car over 48 months.
2. Start an emergency fund
The main reason people end up in debt is due to emergencies. This could be unexpected medical expenses, helping out a family member or having to pay excess on a car accident. An emergency fund helps you get through those emergencies without having to take out a loan or use your credit card.
You also need to build up a financial buffer should you lose your job. Last year Liberty’s statistics showed that the single biggest reason for loss of income claims by under 35’s was due to retrenchment.
Action: Work on an immediate emergency fund of R10 000 and build it up over time, using bonuses and other windfalls, to at least three months’ monthly expenses.
3. Harness the power of compounding interest
The younger you start saving, the harder your money works for you. If your money is invested earning 10% per annum, it will double every seven years.
If you save R250 a month between the ages of 24 and 30 and stop your contributions but leave the money to grow, you will have accumulated more at age 65 than someone who saves the same monthly amount from age 35 to 65.
This is because an investment with a 10% return will double every seven years. So the R18 000 you have invested by the age of 30 will grow to R815 000 by age 65.
The R90 000 you would have invested between the ages of 35 to 65 would not have the same opportunity to grow and would only be worth R570 000.
Action: Make sure you start saving into your company retirement fund or a retirement annuity from your first paycheque.
4. Protect your biggest asset
When you are young and healthy with no financial dependants, life insurance seems like an unnecessary expense. What you may not realise, however, is that your biggest asset at this age is your future income. If for example you are earning R20 000 per month at the age of 25 and never received a pay increase above inflation, by the age of 55 you would have earned R7.2 million in today’s value. That is a pretty big asset and you need to have a plan should anything happen to you to prevent you from earning an income.
Action: Speak to your adviser about disability and critical illness cover
5. Avoid revolving credit
From your first paycheque credit providers will offer you around R3000 of credit for every R1000 you earn. It is a great temptation to tap into this credit but it could destroy you financially, especially if you opt for revolving credit like a credit card or overdraft. Revolving credit is a credit line that is always available and never needs to be paid off in full. As soon as you make one payment, that credit becomes available again. Many people end up in a situation where their paycheque is simply going each month to settle their overdraft and each month they are living off their credit lines. They are basically one paycheque from bankruptcy.
Action: If you take out a credit card always pay it off in full each month and avoid overdraft facilities. Learn to live within your means. |
