It can be said that the decisions we make today may have an immense impact on our future; this is particularly true when it comes to your personal finances. Saving may feel abstract at this point in life, but it can become ‘real’ quicker than you think.
Mistake 1 – Living by the ‘I’m young, I can save for my retirement later’ mentality
It may not be something you want to think about, but the reality is that the sooner you start to save, the better your quality of life may be as you get older and eventually retire. The adage ‘fail to plan, you plan to fail’ is apt in this case.
Your first taste of reality typically presents itself when you receive your first payslip and discover something called ‘deductions’. Not sure what this means? It’s worthwhile speaking to an independent financial adviser. He/she can explain the ins and outs of tax contributions that are automatically deducted from your gross salary.
The ability to look at your finances from a holistic perspective can be vital. You’re working life typically lasts 40 years, and during that time, you should be able to support yourself for those 40 years, as well as approximately 20 years thereafter.
Mistake 2: Not preserving your retirement savings when you change jobs
If you resign or may find yourself in the unfortunate situation of being retrenched from your job, you generally have the chance to access retirement funds to which you were contributing through your employer’s pension or retirement fund; try not to withdraw these savings unless it’s an absolute last resort.
By not preserving these funds, you essentially will have to start saving again from scratch. The older you are when you start saving, the more money you’ll have to put away, dedicating approximately 40% to 60% of your monthly income to retirement while still covering day-to-day expenses may not be feasible.
If you find yourself in a position where you may have to make use of those funds, only withdraw as much as you need because if you exceed SARS tax-free withdrawal thresholds you are likely to be taxed heavily.
Mistake 3: Relying too much on debt to meet present-day needs
Many of us are unlikely to afford big purchases just from our salaries; this is usually where debt kicks in. Debt can be helpful, but it should be managed properly so that the cost of servicing it doesn’t hinder your ability to accumulate wealth over the long term.
If you take on debt, it’s important to use it for an investment that can provide you with real returns over time e.g. a property.
Mistake 4: Not talking to your family about finances
Your parents/guardians are usually the people that assist you financially and emotionally to become a young professional. The feeling to return the favour with financial support in their older years may only be natural. Still, setting realistic levels of support may be best. If you don’t have transparent conversations with your loved ones, you may find you’ll be taking on financial responsibilities that you cannot actually afford.
You don’t have to feel it’s wholly on you to sort out your finances. Enlist the services of a professional independent financial adviser; he/she can help you set goals and help you draw up a realistic plan to achieve them. For example, you may have heard about unit trusts and wondering if it’s a worthwhile investment. An IFA can explain different funds’ factsheets as well as educate you about unit trust prices so that you can make an informed decision.