It seems that a lot of people in their 20s would describe their relationship with money as 'complicated'. Many Millennials, for example, have a tendency to put their money towards experiences rather than possessions or assets like property. And while there's value in once-in-a-lifetime experiences, throwing thousands of rands into trips to 'must see' destinations like Bali and Thailand might be better left until you're more financially stable. While retirement may seem like something you only need to worry about later, it's not. In fact, it's crucial to start saving anything you can, starting today. Here's why:
Your 20's can be challenging, albeit exciting, years. You're setting up your career, maybe starting a family, and navigating the treacherous waters of adulthood, bills and all. So saving is probably the last thing on your mind. But even if you can only put away a small amount at a time, it's crucial that you start saving now. Why? Compound interest. In your 20s, time truly is your friend. The younger you start saving, the more interest you will accumulate over time. Look at it like this: If you started saving a mere R200 a month at the age of 20, by the age of 65, you'd have R767,568 (at 7% interest) to put towards retirement. If you started putting away R200 a month at age 35, by 65 you'd only have R247,040 - significantly less. By starting to save now, you set your future self up for a successful and stress-free retirement.
Renting a small apartment or house may seem like an attractive option because for the most part (unless you are seriously living above your means), the monthly payments are relatively affordable, and you might be able to rent a much nicer place than you would be able to buy at this point. But rent is an expense that you can't ever recoup. The payments that you make on a home loan, on the other hand, are an investment. While you might not be able to go out now and buy a house, you can set yourself the goal of buying a house by the time you are 30. If you are 20 now, that gives you ten years to save and leverage the power of time and compound interest.
One of the best things you can do for yourself right now is to start saving an emergency fund. This fund should be solely reserved for those out-of-the-ordinary and unavoidable expenses. We're talking about a new set of tyres, an unexpected car service, or a medical expense that isn't covered by your medical aid. It's crucial to have this in place so that if you do have an emergency, you won't need to take out a loan for it. To learn more about emergency funds, see our blog post on how to create an emergency fund.
Yes, savings can also improve your credit score, though indirectly. Firstly, opening a savings account is a sign of responsibility and stability and will put you in a good light when lenders review your financial history. Secondly, it will ensure that you always have a little stash set aside to cover all your monthly bills and payments. Making sure that you don't default on payments should be a huge priority, and having a little savings to tide you over on tough months will serve you well.
Life is about balance, and too much of the Millennial live-for-the-moment mindset can jeopardise your financial security. There's nothing wrong with wanting to travel, but it might make sense to start small. Instead of setting your sights on distant lands, it might be a good idea to start with other parts of southern Africa or even parts of South Africa. Save expensive experiences and overseas travel for when you are financially secure. Bali isn't going anywhere.
Budgeting can be tricky, but if you can learn to do it now, it will serve you well into the future and help you to get a solid handle on your finances. You need to make a concerted effort to draw up and stick to a budget. Take a look at what you earn every month. Then subtract your essential expenses (rent, electricity, petrol, etc.,). Lastly, take a look at what you are left with every month and prioritise that money accordingly. See if you can you cut down on eating out and buying clothes, and focus more on saving? If you can, do it. It might take a few months to know exactly what you can put where and there may be some adjustments. But when you feel that you have gotten yourself to a good place with your budget, endeavour to stick to it.
Without clearly defined and thought out goals, you might find it very difficult to save money. That's why it's crucial to set both short and long-term goals. The short-term goals (that you want to achieve in the next year or two) may be to save a certain percentage of your salary every month or to pay off your car, whereas long-term goals may be to put a deposit down on a house in ten years or pay off your student loan five years after graduating. Whatever you decide on, make sure to write them down and create a game plan (and budget) to make sure that you reach them in the time that you want to. Once you have these goals set up, they will give you focus for your saving.
It's easy to overspend on eating out or buying new things, and you need to make saving a conscious habit, one that you fully commit to. You need to challenge yourself to stop spending, to focus on your goals and to cut back on expenses (there are many ways to cut your costs. The sooner you can start putting money away, the quicker you'll start saving and the sooner you'll be financially independent. Start saving today!
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