SERIES: How to be money-wise in your 20s

Last updated on 5th December, 2018 at 02:38 pm

You have your own income and the freedom to choose how to spend it. But it’s also a time to be money-wise and develop financial habits to set you up for life.

This is one of the most exciting decades of your life. You’ve finished studying and started a job. Maybe you no longer live at home and are renting a flat. You have your own income and the freedom to choose how to spend it. But it’s also a time to be money-wise. By the end of this decade, you should have developed financial habits that set you up for life. Follow these four steps to set your feet firmly on the path to financial freedom.

1 Budget like a pro

First, work out what your income is and what you spend every month. Establish daily expenses – food, travel – and monthly outgoings – rent, utilities, debt and clothes etc. Monitor your cash flow. You’ll soon see if you are over-spending on luxuries. R800 a month on take-aways! Really? Use a budgeting app to help track your spending. Try Mint.

2 Pay off student debt

The sooner you start living debt free, the better. If you left college or university with debt, pay it off as soon as possible. It’s usually an advantage if you contribute more than the minimum monthly payment, which will reduce the length of your loan and the amount you pay in interest.

3 Plan your dreams

Is your dream to own a car? Visit New York City? The best way to turn your fantasy into reality is to save. Ask a financial planner for guidance on what you need to save, for how long and at what rate of return to reach your goal. Ideally, you should be saving 15% to 20% of your annual salary. Ask about investing in unit trusts or ETFs (exchange traded funds). These savings vehicles both invest in the financial markets and are highly liquid, so you can access cash quickly if necessary. Plus, you can invest relatively small amounts.

4 Invest for retirement

Retirement? You’ve just started working. Yet, due to the magical powers of compound interest, the earlier you start saving the better.

Consider this. Anathi saved R1 000 per month from the time she turned 25 until she turned 35. Then she stopped saving but left her money in an investment account to accrue at 7% until she retired at 65. Johan didn’t start saving until he was 35. He put away R1 000 per month until he turned 45. He also left the balance to accrue at a rate of 7% until the age of 65. Steve didn’t start investing until he was 45. He also invested R1 000 per month for 10 years. Aged 55, he also left his money to accrue at 7% until his 65th birthday. Anathi, Johan and Steve each saved R120 000 over a 10-year period. Sadly for Johan and Steve, their final balances were very different to Anathi’s. Her fund was worth R1 444 969, Johan’s R734 549 and Steve’s just R373 407.