The financial decisions you make in your thirties can set the general course of your financial journey and it’s absolutely essential to get them right. Major decisions such as marriage, children, property purchases and career-changes are hallmarks of one’s thirties, but the pace at which life moves can leave little time for careful decision-making. Here are some financial pitfalls that should be avoided in this often frenzied decade of one’s life:
- Spending too much money on the wedding
Many couples are delaying marriage until their thirties when they are more financially secure and have established careers. As a result, couples often elect to cover the costs of the wedding themselves rather than burden their parents who may be short-funded for retirement. The average cost of a wedding in South Africa ranges from between R70 000 on the low side and around R150 000 on the upper side, and can increase quite rapidly depending on the number of guests. In addition to the actual cost of the wedding, couples spend on average R30 000 on their honeymoon and between R20 000 and R30 000 on the rings. If a couple borrows R70 000 at an interest rate of 18% to fund their wedding, and pay this debt back over five years, they would have effectively spent R106 652 on their wedding. Starting out one’s life together saddled with debt can create enormous tension within the relationship, especially if the couple’s views on the wedding were not aligned to begin with. Many couples report feeling pressured by their parents and friends to have a more elaborate wedding than they would normally have opted for, something they will quite literally pay the price for in the years to come. It would be more prudent to opt for a less expensive wedding that does not leave you indebted at the outset of your married life. Rather than borrowing money to pay for the wedding, it would be more prudent to save towards a reasonably priced wedding even if it means delaying the wedding for a year or two. Couple with house, vehicle and retail debt, excessive wedding debt can cause untold stress and anxiety on a young married couple. Simply put, spending less on your wedding could ultimately save your marriage.
- Getting married without talking about finances
Surprisingly, there are still many couples who do not talk about money before their marriage. With the number of blended families on the rise, merging marital finances can be a lot more complicated than figuring out who pays for what. According to Stats SA, 1 in 6 South African marriages will end in divorce, and 65% of marriages include children from a previous relationship. Only 33% of children live with both parents. Further, there has been an increase in civil unions (including same-sex marriages) of 15.2% since the previous year (2013). In 2014, 55.4% of divorces involved couples with children younger than 18.
Every couple is faced with a unique set of circumstances that may include issues such as one partner receiving an inheritance; one spouse is still studying and requires financial support from his partner; an ex-spouse that needs financial support; children from a previous relationship; financial obligations to an aged parent; the desire of one partner to set out on a business venture; the desire of a mom to stop working to raise children; where one partner is a spender and the other a saver. As someone once said, forget sex and the mother-in-law, money is the real reason that couples fight. Money is one of the biggest sources of marital discord, and can be very difficult to resolve. More than fighting about Rands and Cents, many people enter a relationship with deep-seated, unarticulated fears about money. Even before a couple gets down to the nuts-and-bolts of the household budget, there needs to be some serious discussions around each partner’s relationship with money. What are their fears? How do they feel about debt? What is their attitude to spending and lending money? Are material items important to them or do they place more value on experiences? Do they understand the need to invest for the longer-term? Are they committed to full financial transparency in the relationship? That’s not to say that these discussions will solve all future money problems, but knowledge is power – and being aware of these issues upfront will lay a foundation for future discussions and more open communication.
- Making debt a way of life
The thirties is generally the time when young professionals choose to invest in property and/or take out vehicle finance and, whilst this is perfectly normal, it is important that debt does not spiral out of control. In many instances, young qualified professionals have confidence in their future earning potential. Knowing that their income should increase quite rapidly in the medium-term often provides young professionals with the temptation to over-extend themselves when it comes to buying houses and cars. Statistics show that car owners in their 30s and 40s tend to have the highest level of vehicle debt. A vehicle’s primary function is to transport a person safely between two places. Anything more than that is a want and not a need. Debt can keep one on a treadmill of paying off yesterday’s expenses with interest. According to the Momentum Unisa Household Wealth Index for 2016, South Africans are spending 21% of their gross income servicing debt. Of this, only 30% is being used to repay home and vehicle loans. The remaining 70% is being used to service consumption loans such as personal loans, overdrafts and credit card debt. A certain level of good (and necessary) debt is essential in this decade of life, but should not be made a way of life.
- Not preserving your capital when moving jobs
According to the US Bureau of Labor Statistics (2015), the average worker currently holds ten different jobs before the age of forty, and this number is projected to grow to see Millennials hold between twelve and fifteen jobs in their lifetime. Millennials are notorious for their short attention spans, and it is not uncommon for them to move jobs every couple of years in search of greater job satisfaction. Generational experts believe this trend should be viewed as ‘career exploration’ rather than career climbing, with their generation perceiving it to be socially and culturally acceptable to explore multiple jobs and industries. The downside is that the movement in careers interrupts the Millennial’s savings progression, making it difficult for them to harness the power of compound interest in favour of their retirement funding. Coupled with this, Millennials enjoy a longer life expectancy than any other generation prior to them, and could realistically spend 35 to 40 years in retirement. Regular career and job changes will provide Millennials with the opportunity to withdraw their retirement fund benefits rather than preserve their capital. This could be even more tempting if she has entrepreneurial ambitions and requires start-up capital. Whilst using preserved capital to fund a business venture is not altogether a bad thing, the decision should be supported by a viable business plan and a financial back-up plan if things don’t work out. Preserving retirement capital in a preservation fund is a prudent move as it allows the investor one opportunity to withdraw from the investment prior to retirement.
- Delaying your retirement funding
Regular career changes, coupled with property and vehicle repayment commitments, provides thirty-somethings with easy justification to delay funding for their retirement until they have more surplus income to spare. Compound interest is either working for you or against you, and the longer you allow it to work against you by being indebted and not saving, the more difficult it is to rectify the situation. With car, vehicle and retail debt being inevitable for the average thirty-something, it becomes increasingly easy to slip into the habit of living in debt and postponing one’s retirement funding. Even a ten-year delay in saving can have significant repercussions for one’s retirement saving, with every further year’s delay making it increasingly difficult to close the funding gap. On average, a person will need to earn a post-retirement income of between 70% and 80% of their current income in order to cover their living expenses.
Importantly, South African investors are permitted to invest up to 27.5% of their taxable income – less any amount that is being contributed towards a pension or provident fund – tax-free into a retirement annuity (up to a maximum of R350 000 per year). Over and above the obvious advantage of investing with before-tax money, it is important to note that income tax and CGT are not charged on the investment returns achieved in a retirement annuity. Further, the money that invested in a retirement annuity is deemed to fall outside of one’s estate and can therefore not be touched by creditors. It is also excluded from estate duty calculations. In other words, the only people who can benefit from your retirement annuity are you and your family. If possible, investors are encouraged to maximise this tax deduction so as to reap the benefits of investing with before-tax money.
- Not having enough life and disability cover
While young and in the process of building wealth, it is essential to protect one’s greatest asset – your income. Your (and your spouse’s) income allows you to service your debt, enjoy a decent standard of living and fund for your retirement years. If, for whatever reason, you were to become disabled or ill and unable to generate an income, it would be prudent to ensure that you have an income protection benefit in place that would essentially pay your current level of income, increasing with inflation, until you reach age 65. Similarly, it would be wise to have enough life cover to ensure that, should you die, your estate can pay-off your home loan and any other debt. If married, one would also naturally want to leave one’s spouse with sufficient capital to ensure that she can maintain her standard of living going forwards. As you accumulate more wealth over time, it would be necessary to downwardly adjust your insurance cover.
According to Stats SA, the national disability prevalence in 2014 sat at 7.5% of the population, with disability being more prevalent among females (8.3%) than males (6.5%). The percentage of people with disabilities increases with age, and 53.2% of people over the age of 85 are reported to have a disability of some sort. When it comes to those who are employed, a survey by True South Actuaries & Consultants conducted in 2014 showed that South Africans are under-insured for disability – with 60% of people not having disability cover in place. As a result, income earners are hard hit when disability strikes, whether of a permanent or temporary nature.
- Investing too conservatively
If you begin investing at the outset of your career, you have a very long investment timeline and should avoid being too conservative in your approach to long-term investing. Accordingly to Laura Carstensen, who is the founding director of the Stanford Centre on Longevity, the old model of retirement investment just won’t work anymore. Through most of human existence, life expectancy was somewhere between 18 and 20. By 1850, the life expectancy in the US had reached 35. By 1999, the life expectancy had reached age 77. It gained 30 years in one century, which is unprecedented. More years were added to average life expectancy in the 20th century than all the years added in all prior millennia of human existence. Their research shows that a 65 year-old man today has a 50% chance of living until age 87 (see table below). A woman has a 50% chance of living to age 90, and a married couple have a 25% chance of one partner living to age 98. If they retire at age 65, they would need to have saved enough money to cover between 70% and 80% of their current living expenses for a period of 33 years!
|65-year old man||65-year old women||65-year old couple*|
|50% chance||87 years||90 years||94 years|
|25% chance||93 years||96 years||98 years|
*At least one surviving individual
Source: Society of Actuaries PR-2014 Mortality Table projected.
Thankfully, living longer also means that one now has a longer investment timeline for interest to compound. Many Millennials shun the idea of a traditional retirement at age 65 with a view to working for as long as possible, and this is great news for their retirement funding. With an extended investment horizon, 30-somethings can afford to take more investment risk and should be encouraged to do so.
- Over-indulging your children
Teenagers are under enormous pressure to sport the latest fashion, cell phones and technology, and this in turn places financial pressure on parents. According to a survey conducted by the Centre for a New American Dream, a teenager who asks a parent for products will ask nine times until the parent eventually gives in. According to a 2014 survey by American consumer analyst, Piper Jaffray, teenagers are spending most of their money on clothes and food, with clothes making up 21% of their total spend, and food at 20%. Electronics account for 6% of their spend, video games at 7%, shoes at 8% and music at 6%. His research also shows that most teenagers are still getting their money from their parents. Nike and Forever 21 remain two of the strongest clothing brands amongst teenagers, with the average Nike sneaker costing around R1 000 – about triple the price of a pair of school shoes.
Much over-indulgence is generated by parental guilt, and this is never a good thing. Children need to be raised to understand that no material item can make them happy, and that owning the latest cell phones, clothes or cars will not make them decent human beings. We need to teach our children the difference between needs and wants, and then encourage them to work for their wants. We also need to teach them the art of delayed gratification which is a skill that they will use in every aspect of their life, whether it is working hard for the qualification that they want, putting in extra hours and effort for the promotion they desire, or training hard for a race that want to compete in.
- Prioritising children’s education over retirement funding
Naturally, as parents, we want to ensure that our children receive the best possible education. This generation of children is faced with unprecedented options in terms of fields of study, online opportunities, short-courses through some of the world’s top universities, part-time self-study courses and internships. As parents, we need to broaden our perspective of what our children’s tertiary education will look like. In addition, as much as we would like to fund their tertiary education as much as possible, we must not do so to the detriment of our retirement funding.
We believe emphatically in prioritising one’s own retirement funding for a number of very sound reasons. Firstly, providing a child with a tertiary education is absolutely no guarantee that the child will be successful or will earn enough money to support you in your old age. One simply cannot place the burden of one’s retirement years on a child. Secondly, there is absolutely nothing wrong with making one’s child aware that he/she will have to contribute in some way towards their tertiary education. Whether they assist in the form of a student loan, scholarship, internships or part-time work, it is perfectly acceptable to involve them in the conversation as soon as they are old enough, and make them aware of the need for their help when the time comes. Thirdly, it would be more prudent to ensure that you are in a stable financial position by the time your child reaches university age in order to be in a position to stand surety for any potential student loans. It will be easier for one’s child to borrow for their education than for you to borrow for your retirement. Another good idea when planning for your child’s tertiary education is to involve grandparents, god parents and other family members. Instead of birthday presents, it would be perfectly acceptable to encourage one’s close family to contribute to your child’s education fund. (Fundisa is a great way to save for a child’s education). This could create a wonderful legacy for a grandparent or godparent. Whilst it is very rare to get scholarships and bursaries for junior and high schools, the opportunities for financial assistance for universities and colleges in South Africa are absolutely endless. If a child is intent on furthering their studies, and has a full understanding that they need to do their bit to make it happen, then the possibilities are endless.
- Not drafting a will
Anyone who has assets and/or minor children, and who wishes to lessen the burden on their loved ones, should draft a Will. The reasons for not preparing a Will range from misconceptions such as one’s estate is not large enough to warrant it, to ill-fated beliefs that there is a ‘good-understanding’ between one children’s as to how the estate should be divided. Dying intestate, or without a Will, is not idea because it means that certain unintended beneficiaries may inherit from your estate. The Master of the High Court will appoint a curator to take care of your estate, and any assets left to your minor children will go to the Guardians Fund where they will be administered by state authorities until your children are old enough to inherit. In addition to this, the state will appoint a guardian to take care of your children, and it may not necessarily be the person you would ideally have chosen. Although anyone can effectively draft a Will, a Will must meet certain legal requirements in order to be deemed valid. Simple errors such as allowing a beneficiary to your Will to sign as a witness can result in him being disqualified from inheriting. The drafting of a Will allows you to appoint your own executor who will be responsible for winding up your estate and distributing your assets to your nominated heirs. It is advisable to appoint someone with sound financial and administrative skills, and who you believe has your best interests at heart. A Will also allows you to nominate legal guardians for your children. In addition to this, you are able to set up a testamentary trust in terms of your Will in which to house the assets bequeathed to your children. This trust will be managed by trustees nominated by yourself in the best interests of your children and until such time as they are able to manage their own money.
Prior knowledge of possible financial pitfalls undoubtedly gives one a tactical advantage when navigating this busy time of life. Forewarned is forearmed.
Stay dry and have a wonderful Wednesday!