Financial planning 101 for young adults
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As a young person who’s recently started working and becoming responsible for your own financial needs, the below scenario may be a reality that’s very close to home. To get your financial planning right, there will be some bumpy rides along the way until you have it all figured out. The biggest lesson as you start out on your journey is, don’t get trapped in ‘living from pay cheque to pay cheque,’ rather work smart with your money.
Asanda Makotle (23) is working in her first job, and this is her story: “My major asset, like most young people, is my income. This is the area I’m most exposed to risk if I were to become sick or injured. But I don’t have it covered. My emergency plan is to sell my car.
Like most people my age, I haven’t thought this far, even though now is the best time to take out life insurance because I’ve got youth on my side and at least 40 years to go before retirement. That’s 40 years of investing in cover, which means my premiums won’t be as high as they will be if I look to take out cover in a few years’ time.
To add even more panic to the situation, I’ve begun to think how 75-year-old me would want to live. Two-minute noodles forever or a healthy meal a day, and the ability to move around and stay young at heart? It is terribly morbid to think like this, but it has kept things in perspective.”
Clyde Parsons, BrightRock’s Actuarial Executive, advises that “Debt can be healthy and unhealthy. Healthy debt is the sort of debt that adds value to your life and is often asset-based, such as a student loan or a car. Unhealthy debt is mostly credit-based and consists of wants and not necessities such as branded gear, technology and thoughtless spending.
But debt is still debt and keeps you from saving for your future or having the money available to you to invest in financial products such as life insurance cover.” Parsons offers Makotle and her peers a few practical day–to-day living tips on how to manage their money as young people starting out in the workplace:
If you’re going to buy a car, save for it – Even if it is small percentage of the cost of the car, put down a deposit. It will bring your monthly repayments down.
Insurance is your friend – If you get into an accident and your car is insured, all you need to pay is a minimum excess. It’s amazing what sort of shift occurs in how you drive and treat your car if you think of car insurance as medical aid for your car.
A big nest isn’t always the best – Be reasonable with the space you choose for yourself. Make sure it’s a fit. If you choose a space that’s too big, you will pay for the excess space, both in terms of rent and in terms of how much money you spend on filling the space with things you don’t need.
Be student loan savvy – If you’re studying, a student loan is a great help. If you’re paying it back monthly, the interest rate is worked into what you pay back. If you pay it all back when you get a bonus or some money, you’re still paying what you would have paid over your loan period. Rather have that money go off monthly and save your bonus in a fixed account where it can gather interest.
Find a financial role model – It sounds weird, but if you have a career role model, why can’t you have a financial one? Choose someone who will inspire you to make smart choices, or just pick your friends carefully. Dan Ariely writes in Predictably Irrational that your circle of influence will determine your behaviour and attitude. Who you spend time with shapes who you become. If all else fails, make a career in the financial sector, it will shock the socks off you.
You can’t avoid tax – It will happen to you. Save for it, because it’s always a surprise. I’d also suggest finding someone to do your tax return for you or with you so that you get it right the first time.
“In the end it comes down to want versus need; will what I want now take away from what I need when I’m a 75 year old? I don’t want to be living on two-minute noodles and lentils in my last years. I got over that when I was a student. I wouldn’t want that for my parents when they retire – so why live like I don’t care about my future needs?”