Finances, budgeting, savings, and investing tips you need to know
With South Africa celebrating its youth on 16 June 2017, Dineo Kekana, Investment Analyst at Novare looks at the different financial life stages and shares some financial planning guidance as to what the youth can expect and how they should be preparing.
“I don’t want to adult today” - the new catch phrase popularly used when one is simply not in the mood to own up to the responsibilities generally associated with being an adult (or more simply put, procrastination). A classic example – paying your monthly bills; who wants to do that when your friend just called and invited you to a day at the beach? The first step when it comes to your finances – always adult and don’t procrastinate.
According to the OECD/INFE International Survey of Adult Financial Literacy Competencies released late last year, adults in many countries around the world display low levels of financial knowledge, fail to engage in financial behaviours that could improve their financial security and have financial attitudes oriented towards the short-term. The survey found that on average, just 56% of adults across participating countries and economies achieved a score of at least five out of seven, considered to be the minimum target score. South Africa was at the bottom of the list, scoring around 30%. On top of that, almost 73% of professional, middle class South Africans experience financial stress, mainly stemming from debt, not having enough money saved for the future, or not having enough money for emergencies or unexpected obligations.
According to South Africa’s National Youth Policy, the term “youth” includes anyone from 14 to 35 years of age. At age 35, it is assumed that the “youth” tend to have their ducks better aligned than the 14-23-year-old bracket. Unfortunately, it has become a lot more common for the youth (referring to the full bracket) to delay planning, preparing and getting clued up on their own finances, largely due to the lack of financial literacy and education provided by the South African schooling system.
The following outline by no means includes everything you should or can know about finances and only acts as a rough guideline. It should also be said that each individual will approach his/her finances differently – for example, at 18 you might well be far beyond the tips shared under age 35. ‘Each to his own’ as the saying goes, the important part is starting. Financial wellbeing requires constant diligence and dedication from beginning to end.
The Freshman: 18 going on 21
Generally, at this stage you have just completed high-school (or getting there). Whether you will be hopping straight into the job market, opt for a gap-year to travel, or go study further in your chosen career path, you will soon start managing your own cash flow (if you’re not doing it already). You may still receive a monthly allowance or you are taking on a temporary/part-time job.
At this age in your life it is recommended that you should:
· Have a bank account, even if it is just a savings account
· Have a basic understanding of creating a budget and tracking your expenses
· Begin saving money each month or setting savings goals – even if it is a small amount to begin with or saving towards something simple such as a new pair of sneakers
· Start getting an understanding of how saving differs from investing
· Educate yourself on the basics of finances, whether through a mentor/parent, a course or research
Assume your positions: 21 years of age (that’s 9 years to go before reaching the big 30)
You have entered the legal age of independence. You are now considered a grown-up. You have completed your first post-schooling qualification or initial work experience and you are ready to enter the workforce (if you haven’t already) and gain independence from your parents/guardians.
You are starting your first job and earning your first salary. You can now afford to spend the money that you have earned. This is often where many people become prone to regular impulse purchases – representative of the life you would like to have rather than the life you do have. At this stage, you should be looking at establishing financial foundations, and should therefore:
· Start getting a better understanding of the South African financial landscape – Inflation, Tax, VAT, the national budget, stocks etc.
· Understand that you have a risk profile, and knowing where you fall
· Have experience in managing your income and expenses in a proper tabulated budget
· Be setting goals for your financial future (even if it is only short to medium term)
· Begin saving for your pension/retirement through a pension fund or retirement annuity by working with a registered financial advisor
· Educate yourself on investing and the kinds of investments that best suit your profile
· Educate yourself on the benefits of a diversified portfolio
Gear-up, it’s time to adult. Hard. You’ve survived your 20’s and reached 30 years of age.
Your twenties have flown past and you are entering the thirty-something group. You congratulate yourself for actually reaching 30 but your bank balance may not be as healthy as you would have liked it to be. You probably want to settle down now - get a property of your own, perhaps find the love of your life, and consider raising a family (if you haven’t accomplished some of those goals already).
Whichever of the latter elements you want to add to your life-tick list, be sure each comes with its own set of financial obligations and will place more strain on your disposable income and budget. It’s time to take stock and re-evaluate your priorities. Now is the time that you will probably start building your assets, which means it’s time to:
· Reassess your financial goals
· Plan for larger expenses – property, schooling
· Reassess your risk profile and portfolio
· Start building a diversified investment portfolio
· Check on your retirement savings and that you’re still on track
You’ve made it past the “youth” category - 40 years of age
Life begins at 40 – so people may say, but financial planning should not be left to this late stage. By now, you would have mastered budgeting and have an investment portfolio that is growing nicely. All the plans you had in mind at the start of your 30’s probably changed beyond any recognition to the situation you thought you would be in, however, your 30’s taught you that life will happen regardless of how much you try to control it.
Statistically, by your 40’s you have reached your highest earning potential, so it would be wise to capitalise on this and ensure your financial planning takes this into consideration. With only 25 years to go before you retire, provision for your retirement becomes very important.
The best way to tackle your finances is to start as soon as possible. Be frank with yourself, honest about your financial goals and dedicated to the process. Financial wellbeing is a daily task that requires a lot of self-discipline and the sooner you start, the better the reward will be.
When structuring your next investment plan (or choosing what you’d like to buy on the investments shelf) it is recommended that you discuss your requirements with an accredited financial advisor who can help you navigate the complexities of investment decisions to achieve your financial goals.