The youth face a number of key life transitions, from matriculating to attaining tertiary education, to starting that first job and ultimately starting a family. While earnings are likely to improve as we get older, the financial demands also increase.
The insights from the latest Old Mutual Savings & Investment Monitor about financial habits and behaviours of the working metropolitan youth are crucial and support the need for youth to effectively think about and plan our finances.
First step in the first job
The first few years of working are challenging for most young people. It is said that he who understands compound interest earns it, and he who doesn’t pays it. This is a fundamental concept, the difference between savings and debt. Understanding this difference has a direct impact on future financial growth.
The Old Mutual Savings & Investment Monitor shows that 59% of the youth respondents have at least one store card. Using such debt can be seen as borrowing from your future income, since repayments (including interest) come from your future income.
On the contrary, saving means putting aside a portion of your current income to use in the future.
Although the interest you earn on your savings can be seen as a “reward”, the interest you pay on debt is a “penalty” for consuming what you have not yet earned.
Although budgeting may seem basic, it has to be realistic and you need to stick to the plan to realise value from of it. Initially you simply need to manage your expenses so they don’t exceed your income.
However, soon you’ll have to start reducing your expenses so that there is some income left over in your budget. This is the point where you have the capacity to start saving.
Short term financial needs
Short term financial needs are cases that may arise anytime within the next 12 months. It is almost impossible to plan for these because they generally come from unforeseen events. It could be anything from death in the family to a burglary.
Your first few months of savings should be used to build up emergency funds, which should be at least three times your monthly salary. Being able to access these savings is far more important than investment growth.
Only a third of the working youth in the survey are currently saving for emergencies. For the other two thirds, debt is inevitable as emergencies are not easy to predict and budget for.
Medium term financial needs
One of the pitfalls when thinking about financial needs is the failure to recognise and plan for your needs in the medium term. These are usually high cost items, such as a dream car and house. Luckily, we can be patient and take some time to save up for these.
Even though you may need to take credit for these, it is considered “good” debt. However, still aim to save for two to five years for a big deposit, which reduces the repayments and interest cost.
Retirement. What retirement?
A long-term financial need, such as retirement in 40 years time, just doesn’t seem a priority to a 25-year-old.
Only 26% of the working youth surveyed say they are saving for retirement.
Unless we make drastically higher savings in the future, this indicates a bleak financial future for the Twitter and Facebook generation.
The amount of lost future retirement benefits due to starting late is severe.
For example, someone starting to save at the age of 35 years, needs to save almost 50% more each month than someone starting at 25, just to have the same retirement income of R10 000 a month from age 60.
Starting in your 20s is a necessity, otherwise you have to save more in the future, or just expect a much lower retirement benefit.
The inevitable future challenges
As we grow up and start families of our own, you must start thinking about the cost of education, and how much you should be saving for quality schools and universities.
This is a double whammy for those who have not started saving early for retirement.
As they catch up on their retirement savings, they also need to start saving for their children’s education.
It will get even more challenging for the 45% to 60% of the youth who, as indicated by the survey, may also need to take care of their parents.
Given the accessibility of information, it is better to equip ourselves with appropriate knowledge and insight.
There are various financial tools we can use to navigate the complexities of personal finance.
However, working with a qualified financial adviser remains key in ensuring that we make informed decisions and use appropriate savings products that enable positive futures for ourselves.
Sinenhlanhla Nzama is a product marketing actuary at Old Mutual