When it comes to finances, the old adage rings true once again, “Hindsight is, in fact, 20/20. The earlier you form good financial habits the better,” says Sanlam Indie’s CEO, Edwin Theron. “The sooner you start to save monthly, invest, or commit to insurance policies – the longer those investments have to compound and ultimately generate wealth and security.”
“Starting with good money habits early on also means they become second nature by the time your living expenses increase. Like when you get married, buy your first home or start a family,” says Edwin.
Five financial actions he wishes he’d taken in his early twenties
1. Live within your means
Credit cards can be a great help in times when you haven’t budgeted for certain expenses. But they can also be a massive drain on your financial wellness if not managed correctly. Getting into the habit of settling the outstanding amount each month means that you pay substantially less interest and lower the chances of the money owed compounding out of your control. It comes down to spending what you can afford and not what you want.
2. Get rid of high-interest debt as fast as possible
If you’re carrying debt from your studies or short-term loans, it’s in your best interest to pay it off as fast as you possibly can. Debt and loans accrue interest as long as you have a balance to settle. Overall, it’s far cheaper to settle these quickly. It gives the debt less time to accumulate interest, meaning that you’ll pay less money in the long run. Having a large debt hanging over your head is no way for you to start in your career and adult life – so throw everything at it early and start by paying off the one with the highest interest rate.
3. The non-negotiable 5%
Set a target for your savings each month and make it ‘non-negotiable’. Whether it’s 5, 10 or 20% – decide on an achievable amount that is transferred (ideally automatically) into your savings on payday, to remain untouched until you need it (for an investment or life event). Try not to think of this as something that you sacrifice but rather as an investment in yourself as it can grow into something much more meaningful. Your future self will thank you.
4. Make responsible insurance decisions
At this point in your life, you may not have any financial dependents to leave behind, but this doesn’t change the fact that you need insurance. When you’re young and starting your career, which will hopefully result in tremendous wealth and happiness over time, insurance is important because, unless you’re a trust-fund baby, your greatest asset is you (and your ability to earn an income throughout the rest of your life).
“At 21, when you might be starting your first professional job, you need to be considering income protection. If you happen to have any dependants (like a child or parent/grandparent you support) and you are still servicing debt in any form – it’s advisable to consider life insurance so that your loved ones are looked after and aren’t left with the debt in the event that something happens to you,” says Edwin.
5. Start a tracker
Knowing exactly where your money goes each month is wonderfully enlightening should you need to make cutbacks, or better – a big purchase. When it comes to upgrading your vehicle, buying your first home or deciding how often you’re able to enjoy a dinner out – knowing your monthly financial situation is critical. Start with a list of expenses and jot down the totals so you know exactly where each cent goes before it’s gone!
Of course, being in a position to implement many of these tips already makes you a part of the privileged few. The reality for many South Africans is that saving, investing and insuring can be incredibly difficult when you’re trying to make ends meet. In this case, focusing on tracking your spending and eliminating bad debt is a good place to start your journey to financial freedom.