There are numerous things in the life of a young adult that make it the best time of your life, from bungee jumping over waterfalls to travelling around the world for music festivals – the bucket list of possibilities is endless.
Nevertheless, as you become more mature and grow older, you can begin making more serious commitments such as getting married, starting a family or buying your first home.
The financial decisions you make in your twenties will have a substantial influence on your financial future.
1. Don’t use your maximum credit limit to buy a motorcar
For many people the opportunity to buy the car of their dreams when they start working is irresistible and motor car traders are only too willing to help them exhaust their credit facilities. It is only after a few months’ use of the car that you realise that you actually can’t afford it.
The monthly instalment is only half of the cost to maintain a car and new car owners don’t always budget for insurance, petrol and general running costs. At this stage the new car owner also realises they cannot sell the car for the amount they owe the bank.
A car’s value diminishes as soon as you drive out of the showroom and should you have financed the car over six years, you will for the first four years owe more on the car than it’s worth! Motor car financing is also the most important reason why people do not qualify for home loans, as they don’t have further credit available for a bond.
Action: Save for a deposit, budget for insurance and petrol and finance the car over 48 months only.
2. Start an emergency fund
The main reason why people land in debt, is because of emergencies. This could be unexpected medical expenses or assisting a family member, or you may have an excess amount to pay after a motor accident. An emergency fund helps you to handle emergencies without having to take out a loan or use your credit card.
You should also build a financial cushion should you lose your job. Last year Liberty’s statistics showed that the single biggest reason for loss of income claims by under 35s was retrenchment.
Action: Establish an immediate emergency fund of R10 000 and let it grow over the term by adding bonuses and windfalls, until it covers at least three months’ monthly expenses.
3. Utilise the power of compounded interest
The younger you start saving, the harder your money works for you.
If you money is invested and grows at 10% per year, it will double every seven years. If you save R250 per month between the ages of 24 and 30 and you stop your contributions but let the money grow, you will have collected more by the age of 65 than someone who saved the same amount between the ages 35 to 65.
This is because an investment with a 10% return doubles every seven months, therefore the R18 000 that you invested at age 30 grows to R815 000 by age 65.
The R90 000 that you would have invested between the ages 35 and 65 will not have the same growth opportunity and will only be worth R570 000.
Action: Make sure that you start saving in your company’s retirement fund or a retirement annuity as soon as you receive your first salary.
4. Protect your biggest asset
While you are young and healthy and don’t have any financial dependents, life insurance looks like an unnecessary expense. What you may not realise, is that your biggest asset at that age is your future income. If for example you earn R20 000 at age 25 and never receive a raise above the inflation rate, you would at age 55 have earned R7,2 million at today’s value. This is a noteworthy asset and you should plan for anything that could prevent you from earning an income.
Action: Talk to your broker about coverage against disability and dreaded illnesses.
5. Avoid revolving credit
From your first salary cheque credit providers will offer you credit of approximately R3 000 for every R1 000 you earn. The temptation is great to utilise this credit facility, but it can ruin you financially, especially if you decide on revolving credit such as a credit card or bank overdraft. Revolving credit is a credit facility that is always available and that need never be settled. As soon as you pay one instalment, that credit is available again. Many people land in the situation where every month their salary is simply used to settle their overdraft facility and they live on credit from one month to the next. In reality they are one salary away from bankruptcy.
Action: If you take out a credit card, always pay the full amount at the end of the month and avoid overdraft facilities. Learn to live within your income.