Young and just started working? Start building good financial habits now

Sitting in front of a 24-year-old new client last week, I was confronted by the question: ‘I’m young and have just started working. I want to get into good financial habits. Where do I start? What are the basics to cover at this life stage?’. While there is obviously no one-size-fits-all solution out there for those entering the job market, there are a number of ways to start building good financial habits that can help lay a solid foundation on which to build your financial future. Consider the following:

Settle your student loan as quickly as possible: Once you start earning, you will need to begin paying back your student loan. Ensure that you fully understand the repayment terms set out in your loan agreement including the minimum amount payable every month. While you may feel despondent starting out your career in debt, remind yourself that your student loan is an investment in your future earnings. Prepare a monthly budget that is realistic and achievable, and which will allow you to make more than the minimum repayment required on your loan. Ensure that you never miss a repayment or make a late payment as this will impact on your credit score. Use a debt reduction calculator so that you can set a target for paying off your loan and, when you achieve it, celebrate the achievement.

Get into the habit of spending less than you earn

Wealth is what you don’t spend, so get into the habit now of spending less than you earn. The difference between what you earn and spend each month – coupled with consistent saving over time – is the key to wealth creation. Be regimental about budgeting and guard carefully against lifestyle creep. Consumerism is not your friend.

Buy reliable transport and avoid balloon payments: Avoid the temptation of spending too much money on a car. Take time, do your research and consider the most practical, affordable car for your needs for at least the next five years. Look past the monthly repayment plan offered by car dealerships as these are designed to lure you into buying more car than you can actually afford and often conceal the real cost of what you’ll end up paying for the car over the repayment term. Avoid car finance agreements that include a balloon payment at the end of the term as this can come back to bite you. Make sure you fully understand the vehicle maintenance plan, the cost and availability of parts, and how the warranty works, keeping in mind that any unforeseeable vehicle expenses can erode your emergency cushion.

Build a cash cushion

Make building an emergency fund an absolute priority. Not only will an emergency fund provide you with financial peace of mind, but it will also save you from having to access debt if you are faced with large, unforeseeable expenses. Securing an emergency fund early on in your career is in itself habit-forming and is a comfort you will grow used to over time.

Access private healthcare

Having access to private healthcare is important for several reasons and should be made a priority. Firstly, it is likely that you will not have the luxury of time to queue for services in public healthcare facilities as this would take you away from your employment or business. Secondly, not belonging to a registered medical aid scheme could result in your premiums being loaded in the form of late joiner penalties when you do eventually decide to take out membership. If you’re moving off your parents’ medical aid and onto your own, ensure that you do not have a break in membership of more than 90 days as this could result in the imposition of waiting periods and exclusions. As a bare minimum, secure membership of an entry-level hospital plan and then re-assess every year or as and when your affordability improves.

Understand the longer-term implications of your purchases

With a secured income, you may be tempted to spoil yourself but, before doing so, give thought to the longer-term implications of your purchase. For instance, while buying a pet may seem like a good idea, consider the ongoing costs of having a pet including vet bills, pet insurance, food, pet accessories, and pet-sitting services – and then work these costs into your budget to make sure they are realistically affordable.

Build your credit record

Be intentional about building and protecting your credit score as this is something your future self will thank you for – especially if you need to apply for finance. Your credit score is a number between 0 and 999 that indicates your credit health to future financial service providers which, in turn, will affect whether you can access finance or loans. It will also impact the interest rates you will be charged and the type of credit you will be able to secure. It can take a number of years to build a favourable credit score, so start now by understanding how to build a good score. Things that can negatively affect your score include missed or late debt repayments, having an unhealthy debt-to-income ratio, having too much unsecured debt, applying for too much credit and not exercising the responsible management of your bank accounts.

Protect your future income

Income protection is a form of long-term insurance which is designed to replace your income if an illness or disability renders you unable to earn your income either temporarily or permanently. While many consider this type of cover to be a grudge purchase, especially when you are young and healthy, the risk of a temporary disability which prevents you from working for a period of time is actually quite high. While you are in the process of building your net asset base, consider insuring your income so that you are not left destitute should tragedy strike.

Know how tax works

If you’re young and earning an entry-level income from a single employer, your tax liability is likely to be limited to PAYE. But, as your earnings and asset base increase, you will not only become liable for different types of tax but may qualify for different tax exemptions which can save you money. As such, make a concerted effort to understand how tax works, how to calculate your taxable earnings, and how to submit tax returns on the e-filing system. As your finances become more complex over time, you will be grateful for the tax acumen you acquired earlier on in your career.

Create a financial filing system

You may be surprised at the type of documents you will be required to produce when applying for a job or promotion, registering for a course or degree, submitting your tax returns, getting married or divorced, or registering a child’s birth, so start now by creating a financial and legal filing system so that all important documents are properly collated and easily accessible.

Think financial freedom, not retirement

At the outset of your career, retirement is probably the last thing on your mind – and may be difficult to find motivation to invest towards such a distant goal. Our advice is to set aside the concept of retirement and focus on what financial freedom looks like for you. If you never had to work another day, would you still want to? If you only had five years left to live, what would you do? How much is enough? If you had enough money to live off for the rest of your life, what would your day look like? Remember, along with financial freedom comes freedom of choice, so understand what you would do with your choices if you had enough money invested.

Don’t buy property for the sake of buying property

There are many cheaper and easier ways to own property without having to physically buy bricks and mortar so, before buying property, be sure to understand your reasons for doing so. If you intend to buy property to live in, remember to take a long-term view on ownership. This is because buying and selling property is expensive in terms of transfer fees, moving and setting-up costs, connection fees, etc. If you’re intent on buying property to live in, give careful consideration to the location of the property in relation to where you work, the size of the property in terms of your needs over the next five years (at least), crime, traffic, amenities, and resale value.

Pay cash

Not being able to afford things that you really need can be incredibly frustrating. Living frugally, especially when you are working hard and not necessarily seeing the financial rewards of your hard work, can make you feel despondent. But there are valuable lessons to be learned in times like these, such as the value of delaying gratification and saving up to buy goods with cash rather than incurring short-term, expensive debt. Get into the habit now of saving up and paying cash for good quality items that will last. Having a throw-away mindset fuels consumerism, so be intentional about your purchases in terms of their quality, environmental impact, sustainability and longevity.

Have a wonderful day.


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