Although many of us think of our twenties as carefree years to be enjoyed without worry, being totally nonchalant regarding our finances could end up setting us back in life.
As we celebrate Youth Month, Khwezi Jackson an investment consultant outlines five common money mistakes to avoid so you can set yourself up for success instead of regret down the line.
From earning our first pay cheque and buying our first car to moving out of our parents’ home, adjusting to adult life can be both invigorating and overwhelming.
If we get it right, our early adulthood doesn’t have to become just a series of cautionary tales we tell our children.
Here are five money mistakes to avoid in your 20s:
1. Delaying saving for retirement
If you’ve ever thought that saving for retirement is tomorrow’s concern, think about this: As young people, the future belongs to us – but only if we prepare for it. The path to financial independence is paved with planning, budgeting, saving and investing.
When it comes to investing, the earlier you start, the more time your money has to grow. If you leave your money invested over time, the magical power of compound interest will grow your money for you and you will earn interest on the interest you have already earned in a virtuous cycle of growth.
You alone are responsible for the type of retirement you will have, so why not make the necessary preparations now to ensure your ‘golden years’ are actually golden. Use free tools such as a retirement savings calculator to set out some goals and start the process today.
2. Not setting up an emergency fund
No one can predict what life will throw your way but one lesson we can all admit to learning, time and time again, is that preparation is key. To help you prepare for life’s curveballs, be it retrenchment or a flat car battery, it’s best to have an emergency fund.
Don’t think of it as an investment but rather as a savings plan. Investing builds wealth and saving will secure it. The general rule of thumb is to have at least three to six months of your take-home pay saved in a low-fee money market fund or income fund for rainy days.
Having a safety net of cash means you don’t need to access your long-term saving funds and potentially derail your future goals. Plus, an emergency fund will give you peace of mind and teach you the discipline of putting money away consistently.
3. Letting your money control you
Like most other journeys in life, the path to financial freedom starts with the basics: budgeting. Everyone can benefit from a budget, not just those who are trying to save money. A proper budget enables you to understand your current situation in the context of where you want to be and, importantly, it helps create a pathway between the two.
Think of a budget as a roadmap. Essentially, it will guide you to where your money should go and what to do instead of allowing your money to control you. Start by listing your incoming money, your outgoing money and your objectives. Then create a plan around your spending and refine this into a strategy that empowers you to reach your goals.
4. Not educating and informing yourself
The saying “knowledge is power” is especially relevant when it comes to personal finances. Even if your parents have taught you the basics of handling your finances responsibly, there is always more to learn and so many resources at our fingertips.
Learn about saving and investing and inform yourself about taxes and fees. Remaining ignorant about key financial levers will make you vulnerable to being exploited or making poor decisions.
5. Trying to keep up with the Joneses
Many people, especially us younger folk, easily fall prey to peer pressure, which sees us waste our money on flashy cars, meals in fancy restaurants and other nice-to-haves.
Usually this is done in the hopes it will make us look successful to our peers. But nothing looks as successful as success itself and burning all your money on flash purchases is not going to help you get there.
The most dangerous part of “trying to keep up with the Joneses” is that you may start relying on your credit cards, store accounts and general loans. The next thing you know, you’re in a debt spiral that can take a long time to recover from. Make an effort to live within your means. It’s the best gift you could ever give yourself.
One of the greatest advantages we have as young people is that we have time on our side. We might think that living our best lives comes at the expense of making smarter decisions but the truth is, we can do both. If we manage our money more wisely, we won’t have to end up living in regret later on.
Khwezi Jackson is an Investment Consultant at 10X Investments.