You are young and your first pay cheque is burning a hole in your pocket. The world is your oyster thanks to the credit every second retailer and bank is offering you. Sound familiar?
Well stop for a moment and think about your twenties, not as the years of living frivolously but rather as the years of living carefully and building the foundations of a financial future you can one day be proud of.
Need a little help? Albert Einstein once said that a clever person solves a problem, but a wise man avoids it. With that in mind, 1Life outlines five financial mistakes often made by people in their twenties and offers some advice on how to avoid them.
The great thing about being in your twenties and having a job is that at the end of the month your employer deposits a pile of money into your bank account. It’s easy to see your salary as a spending goal to be blown on anything that catches your fancy without a thought for the future. And hey, if you run out of cash before the end of the month, there’s always the option of going to mom’s for supper until the next pay cheque rolls in.
One of the biggest mistakes you can make in your twenties is not having a budget. Making an effort to understand where and how you spend your money will help you cut costs, avoid debt and allocate funds to save for the things you really need. Start by working out all your income after tax (this includes all forms of income you receive), write down your existing expenses and then track your spending for a couple of months – be honest and write down everything. You can use a spreadsheet like the one found at My Life, My Money to help you out.
With a job to your name, the world of credit and loans is opened up to you. Your bank will offer you an extended credit limit, store credit cards will become appealing prospects, you’ve bought a car and you’re starting to think about buying a house.
While debt is a great economic enabler, the repayments can also cripple you financially. Although you may qualify to borrow large sums of money, this doesn’t necessarily mean you should. As a rule of thumb, never buy groceries, clothes or entertainment on credit – these should all come comfortably out of your monthly budget. Then, do your best to save rather than borrow to buy the other things – or in the case of a house or car at least save a sizeable deposit.
With a budget in hand you can work out your savings goals – short term is anything under one to two years, medium term is two to five and long term is anything after five years and includes retirement. Think about what you want to achieve in each of these timeframes and then work out how much you’ll need to put away to get there. Most importantly pay yourself first - don’t wait until the end of the month to save “what’s left”.
Examples of short-term goals are things like a new sofa or iPad. A medium-term goal might be an overseas holiday or the deposit on a house or car. Long-term goals include retirement planning, which you should have started from your first day of work to realise the benefits of compound growth over the maximum number of years. And in your twenties, you should also already have started saving towards a “rainy day” fund, which is an emergency stash of cash to be used if you are retrenched or have unexpected expenses such as car repairs, for example.
While saving is important, where you save can also makes a big difference. Research retirement planning carefully and speak to a financial planner about the best savings and investment options to meet all your goals.
Everyone’s been telling you to get a foothold on the property ladder and you think it’s about time that you bought yourself a nice car. So you take a careful look at your current lifestyle and identify the home and wheels that suit you perfectly. That makes sense, doesn’t it?
Well, it does, up to a point. If you’re in your late twenties and likely to get married or have children any time soon, think about what your needs will be three to five years from now. A one-bedroom apartment might make less sense than a two-bedroom house in a more suburban setting. A fancy hatchback car with no rear doors will soon need to be traded in for a more sensible one with easier access to car seats. Remember when you buy a home, you will most likely have to pay transfer fees and costs on the purchase amount – and remember that new cars lose significant value as you drive them off the showroom floor - so try avoid the “buy now, upgrade later” mindset.
While all the points in this article have been about sound financial planning, it’s also important to remember that in your twenties you have the opportunity to identify what you really want to do with your life before you’re bogged down by responsibility. Wealth should not be pursued at the cost of happiness, so use the mortgage-free, childless years to work out what you want from life and pursue it. Whether this means studying further or changing direction when you’re unhappy - allow yourself the freedom to make mistakes while finding your path.
Your twenties are one of the most exciting times of your life – you’re still young and relatively free of responsibility but you are officially an adult with an income and independence. However, it’s what you do now that will establish good financial habits for the rest of your life. Being financially responsible will make all the difference to your thirties and forties – decades that you’ll experience surprisingly soon. So take the small steps now that will help you to cover great distances later in life.