In a nutshell: Young South Africans navigating the waters of personal finance might feel as if they’ve been thrown into the deep end without a life vest, especially due to the lack of formal education on the subject.
Once you start working, you are expected to know how to budget, save and invest, although you have not formally been taught how to do so. As a result, many young people struggle to manage financial commitments due to a lack of proper guidance. Here are some tips to help you paddle your way to financial security and avoid those pesky financial whirlpools.
1.Take stock
The first step to sound money management is to take stock of your current financial position. Basically, you need to take a dive into your banking transactions and find out what exactly you’re spending your money on.
Once you’ve established where your money is going, you will be able to use this information to channel your inner accountant and set up a budget. Create a budget to track your income and expenses. Make sure you allocate your money wisely (differentiate between your needs and wants), ensuring that essentials are covered before allocating money to non-essentials. Sounds boring? Maybe, but budgeting is necessary to help you achieve your future financial goals.
Have a look at our Excel budgeting tool to help you manage your expenses.
2. In Case of Emergency (ICE) fund
Life can always surprise you with unexpected bills. With that being said, it’s important to make sure you’re financially ready for anything that may come your way. As soon as you start to earn an income, one of the first goals you should set for yourself is to create an emergency fund. This fund is like having a financial umbrella for a rainy day.
Start saving as soon as possible. Even small amounts set aside regularly can grow significantly over time as a result of compound interest. Aim to save a portion of your income each month for emergencies, future goals, or retirement.
3. Start investing
Educate yourself about investing and consider starting early. Investing in stocks, bonds, mutual funds, or retirement accounts can help grow your wealth over time. Consider dipping your toes into the investment pool early on. However, it’s essential to understand the risks and seek professional advice BEFORE investing.
The best time to consider setting up your retirement fund is NOW! If your company doesn’t offer a retirement plan, get in touch with a financial advisor and find out what your options are. Remember, the earlier you start investing towards your retirement, the more you stand to gain from the power of compound interest.
4. Be credit-card and loan savvy
Credit cards and loans can be double-edged swords. Credit cards give you access to funds today while allowing you to pay them back tomorrow. These financial tools can be incredibly helpful, especially if you find yourself in a tight financial situation. An added bonus is that if you’re diligent about returning what you borrowed, it’s also a great way to build your credit score.
But while they offer convenient access to funds, mismanaging credit cards and accounts will lead you down a slippery slope to debt. Paying back what you borrow is crucial and if you miss your repayments, your debt will quickly increase and your credit score will take a hit. Try to pay off your credit-card balance in full each month and borrow only what you can afford to repay.
5. Protect yourself from fraud
Keep a vigilant eye on your bank statements and credit reports to safeguard against identity theft and fraud. This will ensure that you qualify for credit when you need it, such as vehicle finance or a home loan. On top of this, it will also alert you if you have been a victim of identity theft. For example, if you regularly view your bank statements and/or credit report, you will immediately notice when a fraudulent account has been opened in your name. By staying proactive, you can protect your financial reputation and prevent any nasty surprises down the line.
Conclusion
It is important to live within your means. Avoid the temptation to overspend to keep up with others. Focus on your own financial goals and priorities and resist impulse purchases or “lifestyle inflation” when you live beyond your means. By living within your means, you’ll have more control over your finances and be better prepared for unexpected expenses or future opportunities.
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