A guide to financial planning in your 20s: Where to start?
Getting started on planning your personal finances is an overwhelming task. Apart from feeling totally clueless, it's difficult to know where and how to begin and who to seek advice from.
The countless services available, the financial jargon and the obscure percentages can be daunting and paralysing. This contributes to many young South Africans postponing their personal financial plan to their "future self".
But if there is any advice worth taking it is, "to just get started!". This core advice was shared with a group of 20-35 year olds at a recent panel discussion hosted by the Financial Planning Institute of South Africa (FPI) during its annual Financial Planning Week.
Here are the key elements the experts - all of whom hold the Certified Financial Planner qualification - shared on how to get started on your financial planning journey.
Your credit score:
You have probably heard that it is important to cultivate a good credit score so that you can get a loan to buy a car or a house.
Your credit score measures your capacity to repay what you owe and while it is good to ensure a good score, remember that credit costs you as providers charge interest, Jennifer Nedzamba, an adviser at Netto Invest, says.
Nedzamba says you should try to only access credit for "good" debt. "Bad" debt is when you use credit, often at higher interest rates, to purchase non-essential, luxury items that do not appreciate in value.
A loan for property that appreciates or a student loan that enables you to study to improve your future earning capability, are examples of good debt, she says.
Using store cards can be helpful in building up a positive credit score, but Pierre Taljaard, an adviser at Fiscal Private Client Services, says a store can also make it easier for you to buy goods without considering whether or not you actually have the money to do so. There is more benefit to the store than to you and the interest rate may be very high.
When using a credit facility make sure you are not paying more than you need to - compare interest rates, Gareth Collier, an adviser at Crue Invest, says.
However, he says that if you can make use of the interest-free period on a credit card and then pay it off in full each month, a credit card can be very useful.
Jonathan Botha from Netto Invest says if you need to improve your credit score get a store card at a store you won't be tempted to buy from, "for example go to Builders Warehouse, buy a hammer and pay it off", he says.
If you ever find yourself in trouble with your debt repayments don't hesitate to negotiate a repayment plan with your credit provider, or if you are unable to manage your repayments get a debt counsellor to help you get an affordable repayment plan, Clare Cousins from Veritas Wealth says.
Buying your first car:
When the time comes to buying a car, purchase something you need as opposed to something you want, Collier says. "Don't over-commit!".
In financing a car, you again access credit. "The more you can put down upfront, the less the amount you have to finance, which means the lower amount of interest you're going to land up paying."
Collier also warns against using balloon payments that lower your monthly instalments as it leaves a large lump sum to be paid off later, which many car owners find they cannot afford, forcing them to sell the car.
It's important to factor in the extra costs when you consider which car you can afford.
"You forget about the little things, such as what is the car going to cost you to insure on a monthly basis, what is it going to cost to maintain, what type of tyres does it need, what will your fuel consumption be."
We all need a roof over our heads. But how do you transition from renting a property to buying one?
Most people can't afford to buy a house in their early 20s and so renting during this period is appropriate, Botha says.
"See your rental phase, say a period of 3 to 5 years, as a time to consolidate your expenses and drive up your savings in order to build up a deposit. This will put you in a strong position when you find the right property," he says.
Although building up a deposit can be difficult, Nedzamba says a substantial deposit will lower the bond you need to take out, your monthly repayments and the interest you will pay over the term of the bond.
"For example, if you're looking at a flat for R1m, a 10% deposit will be R100000. Saving this is achievable if you're putting away R4500 a month over two years," she says.
Taljaard says, "the biggest mistake people make is not understanding the extra costs beyond the asking price of the property." You need to factor in the transfer duty, attorney's costs and bond initiation fees.
"Also forgetting to factor in the expenses beyond the monthly bond payment. For example, home maintenance, rates, levies etc," he says.
When looking for a property, it is important to consider the potential for your property to grow in value. This depends on the area in which it is located - buy the cheapest house in the best location you can afford.
The most important insurance to have is that which covers you against losing your ability to earn an income as the value of your future earnings is greatest when you are young.
You need cover that ensures that you continue to receive an income if something unfortunate happens and disability prevents you from earning, Collier says.
"We all have insurance for our cars, but what about your earning ability, that is more important," Nedzamba says.
Collier says if you don't have children, you are less likely to need life insurance that provides for dependants should you die. You may need credit life cover to repay a loan or credit should you die or become disabled.
"Insurance is there to meet a need. If there is no need for it don't let someone sell it to you," he says.
Taljaard says most people enjoy life and disability cover as a benefit of being employed. But he stressed the importance of assessing your workplace cover against your needs.
If you leave an employer, check if you can continue the cover by paying the premiums yourself as it may be cheaper than cover you can obtain in your personal capacity, he says.
It is important to have enough cover, but don't over-spend - rather save the additional money, Jordaan says.
You can harness the powerful force of compounding interest if you start saving - even the smallest amount - when you are young.
Remember that there is no such thing as getting rich quickly, Nedzamba says. If you are patient, however, a long-term investment with an inflation-beating return will reward you, she says.
To achieve an inflation-beating return you will need to invest at least some of your money in shares through for example unit trusts or exchange traded funds that invest across the asset classes.