A particularly exciting decade, one’s twenties is the period when many of us launch our careers, find a life partner, buy property and get serious about our finances. Without the benefit of life experience, this decade can also be one where we make financial mistakes which can slow down our start. Here are some common mistakes to look out for:
Not taking calculated risks
With time on your side, this is the decade where you can take calculated risks. Without the responsibility of a life partner, children, property and/or pets, this decade allows you go grab opportunities more audaciously and see where they take you. Whether it’s travel, further studies, a business venture or moving to a new city, you have the time to experiment, try your hand at new things, and pursue business ideas that you feel strongly about.
Not creating good money habits
At the same time, this is also a good time to become disciplined with your finances so that you create lifelong money habits such as spending less than you earn, not living off debt, budgeting, responsible use of credit cards, ensuring you are appropriately insured, and investing for the future. Use this decade to learn to pay your bills on time and every time, build up an emergency funding, track your expenditure, practise responsible banking, improve your credit score, and set up debit orders.
Not using your free time to generate extra income
While you are young and have relatively few responsibilities, use the opportunity to get ahead financially by using your spare time to generate extra money. Whether you choose to tutor, coach, give extra lessons, do after-hours web development or coding, or monetise a hobby, be intentional about putting your additional earnings to good use such as building an emergency fund or paying off student debt. Ideally, put plans in place to generate some form of passive income that supplements your regular income.
Not moving straight onto your own medical aid
As you become financially independent from your parents you will need to move off their medical aid. Do not make the mistake of thinking that you’ll join a medical aid at some later stage. Instead, move straight onto your own medical aid and ensure no break in your membership. Allowing for a break in your membership can give rise to exclusions, waiting periods and possibly late joiner penalties.
Driving too much car
Avoid the temptation of buying too much car for your purposes as it will only serve to burden you with extra costs such as higher insurance premiums, fuel costs, tyre replacements, and expensive spare parts and services. Do a careful assessment of your needs before buying a car. How much and how often do you travel? Where do you park your vehicle? What storage space do you need? Do you need off-road capability or is it a nice-to-have? Think also about how often you use ride-hailing services, and weigh up the benefit of driving a less expensive car if you are a regular user of Uber, Taxify or similar services.
Not negotiating your salary
Once you are employed, it is very difficult to negotiate a salary increase or better benefits. The best time to negotiate your salary and benefits is during the recruitment process, so don’t let the opportunity go to waste. Do your market research and know exactly what a person with your qualifications and skills set is worth before entering into the negotiations. Avoid going into an interview undecided on what your salary and package expectations are as this will only make you appear undecided and unsure of your worth.
Be careful of borrowing money from your parents
While your parents may appear both willing and able to help you financially to buy your first property, start your new business venture or fund your overseas travel, be cautious of making assumptions regarding their financial circumstances. Be sure that they are not dipping into their retirement savings in order to lend you money. If they are private people, they may not wish to discuss their financial affairs with you, and you could unwittingly be compromising their financial security. Now’s a good time to open the channels of communication with your parents about their retirement funding.
Don’t collect cards
Don’t be persuaded to apply for credit cards and retail accounts. While banks and retailers offer convenient credit facilities, this type of debt is expensive and can cost you hugely over the medium term. Having too many credit facilities makes it difficult to keep track of your debt, can result in late payments and interest charges, and can ruin your credit record. If you do require a credit facility, operate one facility that is linked to your bank account for ease of transacting and making on-time payments.
Not learning to cook
Convenience expenses – especially costs such as take-away and ready-made meals, canteen lunches and coffee-on-the-go – are difficult to track and eat away at your disposable income. If you haven’t yet learned how to cook, now is a good time. Knowing how to cook quick, healthy and cost-effective meals will save you a fortune and will be better for your health in the long-term. There are loads of Youtube channels that provide step-by-step instructions on meal preparation for every level of chef.
Don’t fall for ‘spend to save’ marketing
While it’s great that there’s literally an app for everything, many of the apps we use on our smart devices come with all forms of ‘spend to save’ deals and push notifications that are hard to resist. Every fourth smoothie free, two meals for the price of one, and/or discount vouchers on selected items are all marketing ploys to make us spend rather than save.
Staying in a job you hate
If you’re working full-time, you’re spending around half of your waking hours at work and staying in a job that you loathe can be absolutely soul destroying. While friends and family might constantly remind you how ‘lucky’ you are to be employed, job satisfaction cannot be underestimated. Being unhappy in the workplace can lead to anxiety and/or depression, work performance and disciplinary issues, insomnia, stress and tension at home. If you’re stuck in a job that you hate, don’t be afraid to change jobs. Update your CV and Linkedin profile, clean up your social media profiles, get references from clients and colleagues, do your market research and actively pursue another job. Do not simply send your CV to a recruitment agency and wait for someone to come knocking on your door. In this economic environment, you need to be proactive and resourceful.
Being too afraid to change direction
If you’ve spent seven years studying law and doing articles only to find that law isn’t for you, do not be afraid to change direction even if it means going back to university or college to study what you are truly passionate about. There is no point spending the rest of your life doing a job that you’ve identified in your 20s as being not for you. In any case, the rate at which technology and AI are disrupting industries, no career has any guarantee of surviving into the future so you might as well make the change while you are in your 20s. While eyebrows might have been raised a few years back if you announced your intention to pursue a career in gaming, the industry is now larger than the world’s movie and music industry combined, and you can get a bachelor’s degree in gaming.
Not taking enough investment risk
With formal retirement being 40 or more years away and human life expectancy rapidly increasing, your horizon allows you to be more aggressive when it comes to investing for the long-term. With years of earning ahead of you, you can afford to take on more investment risk by investing through more aggressive portfolios while at the same time taking into account your personal investment profile. According to a recent Wall Street Journal analysis, twentysomethings tend to invest too conservatively by putting too much money in cash and bonds, and not enough in equities. Remember, while a low-risk portfolio may produce better outcomes during an economic downturn, it is a severe handicap in the long term.
Not learning how tax works
South Africa is one of the most heavily taxed countries in the world and in order to reduce your tax bill you need to know how tax works, what you pay taxes on, and what tax relief is provided by legislation. Be intentional about learning how you are taxed, how to prepare your tax returns and do your own e-filing. A great online facility is www.taxtim.com which provides tax advice and services to millions of South Africans. From a tax-efficiency perspective, your financial adviser should be able to help you set up tax-efficient investments to ensure you are maximising these benefits.
Buying property too early
As your earnings increase and your career path is on an upward trajectory, it may be tempting to buy property – but avoid buying property just for the sake of it. Buying and selling property is expensive, so think medium- to long-term before investing in a home. Where do you work? What are the traffic implications of buying in a particular suburb? Is there a possibility of your work location changing? Do you plan on marrying in the near future? What about children, pets, live-in domestic workers, off-street parking and security? Is there a possibility you may emigrate or work overseas for an extended period of time?
Working for a multi-level marketing company
While multi-level marketing companies may appear to be very attractive options for earning, the reality is very often the opposite. Their business models and commission structures are, by design, complicated and difficult to understand, making it difficult for you to get a clear picture of how you will earn your money. Many multi-level marketing schemes require new recruits to pay upfront joining fees and to acquire expensive stock, with no promise of refunds for unsold goods. As the MLM releases new products, you encouraged to reinvest any ‘profits’ you make back into your business by buying more stock for your inventory so that you can qualify for even bigger ‘profits’. Besides for alienating your friends and family, it’s likely you will lose a lot of money and end up with stock that you’ll struggle to give away.
Not understanding your financial personality
Your 20s is also a good time to explore your financial personality and investment profile as these will affect the way you view money, spend and save, and how you choose to live. Understanding your financial behaviour will help you to make smarter money decisions going forward. Knowing your risk tolerance and your preference for aggressive versus conservative investments will make financial planning much easier and more enjoyable for you.
Not becoming a global citizen
In a global economy it is important that you equip yourself to be a global citizen. Make a concerted effort to build a transportable set of tools, skills and qualifications so that your marketability is not restricted by where you are currently living. Keep your passport updated, learn a foreign language, do courses or certificates online through globally-recognized institutions, apply for exchange programmes, explore international conversion course options for your qualification, attend overseas conventions, engage globally on your online platforms, and subscribe to international publications.
Marrying the wrong person
Almost without exception, a divorce will set each partner back financially and it can take years to recover from the financial effects of a broken marriage. Before getting married, be sure that you are doing so for the right reasons and that the person you plan on marriage shares the same value system as you. Importantly, make sure your intended life partner is financially responsible and wants to partner with you to create joint financial security.
Funding an elaborate wedding
Young couples face enormous pressure from family and friends to stage impressive – and often outrageously expensive – weddings. What used to be a single event, weddings are now multi-event affairs that begin with elaborate engagement parties with professional photographers, save-the-date announcements, bridal and stag weekends away, family dinners, pre-wedding celebrations, stylised photography and videography, overseas honeymoons and even after parties.
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