Developing good financial habits start at a young age

As we say goodbye to Youth Month, Sowetan Money takes a look at how getting financial literacy from an early age can lead one to making well-informed decisions about their finances later in life.

FNB integrated advice product head Ester Ochse says nothing comes close to understanding financial literacy at an earlier age because it helps develop healthy lifelong financial habits.

“The reality is that a lot of young people tend to easily give in to instant gratification and living in the now when it comes to managing their monthly salaries and finances,” Ochse says.

“This derails them from making sound financial decisions as they continue to grow in their careers. As we commemorate Youth Month, we urge our young professionals to have solid financial goals – be it for the short or long-term.

“It is important that they take a few steps when it comes to making any simple or complex financial planning decisions. But making smart money moves when you are a young professional will benefit you significantly as you navigate through financial freedom and wealth creation,” she says.

Institutional client manager at M&G Investments Zuhair Allie adds there are ways young people can use to start building a foundation of financial discipline from your first pay cheque that will benefit you in the long run.

Allie gives tips on how to build a foundation of financial discipline:

Start early, start small: By starting early and investing consistently over the long term, you allow your money to grow over a longer period, which can lead to substantial wealth accumulation and financial security. You will have a significant time advantage if you start from an early age due to the power of compounding. This is where the investment returns you earn today build on the returns you earned yesterday along with your contributions. The longer this process continues, with returns reinvested and few withdrawals, the lower your chances of loss and the higher your odds of a better future, even if you don’t yet know what your goals are.

The later you start investing, the more you need to save and invest to reach your financial goals. On the other hand, the earlier you start, the less you have to invest later in life. A sound strategy is to start by investing in unit trusts from as little as R500 a month, and then increase this amount by a minimum of the inflation rate every year. Also, every time you receive a salary increase, try to boost your investment contribution by the same amount – you’ll never miss that extra amount.

The first goal of investing is to build up enough money to cover three to six months’ worth of salary so that should something unexpected happen, such as medical costs you didn’t anticipate, you have the money to cover them without derailing your budget and your long-term financial plans. Unit trusts are a great vehicle for building up such an emergency fund.

Consider investing tax-free: Tax-free investments are available to South Africans of all ages and are accessible in various forms, including unit trusts. Unlike normal unit trusts, tax-free investment returns are exempt from all local taxes including income tax and dividends tax, so your returns aren’t diminished by taxes and the benefits to your financial goals are therefore greater. This makes for powerful compounding over the years and an important part of any investment portfolio. You can invest up to R36,000 per year, up to a maximum of R500,000 over your lifetime in a range of tax-free funds.

Flexibility around risk: Because you’re younger, you can be more flexible about the amount of risk you’re willing to take when you invest, since you have longer to make up for any periods of market underperformance. This allows you to invest in higher-risk and higher-reward assets such as equities and listed property, which have the potential to generate significant returns over time. High-equity multi-asset funds such as balanced funds, can hold up to 75% equity exposure while also diversifying the remaining 25% across other asset classes to protect portfolio downside. A minimum five-year investment timeframe is recommended to get the most out of a balanced-type fund.

Avoid trying to “keep up with the Joneses”: Getting your first salary or income can be quite a cause for celebration and the temptation to splurge is not easily controlled with all the excitement. But try to remain focused on your investment goals, which can be compromised by spending money unnecessarily or to keep up with other people. Instead of tagging along with friends to an expensive destination that is out of your budget, a more disciplined approach would be to plan and invest towards an affordable getaway. The memories may be priceless but funding a holiday on credit or cashing in your investments will have implications long after the holiday is over.

Financial knowledge is powerful: Spend some time every week broadening your financial knowledge base, which will support your disciplined approach to personal finances and investments. The more knowledge you gain early on, the more you can benefit from it throughout your life. By being more informed, you’re more likely to make informed financial choices that over time create a solid foundation for achieving your financial goals and building a secure financial future.

Ochse says the money decisions we make when we are young set the tone for how we will manage our finances in future.

“As a young professional, be very intentional about the small or big financial decisions you make as they are crucial in helping you succeed in pursuing the best opportunities that life has to offer,” Ochse says.

She shares six smart money moves that young professionals can consider when managing their finances:

• Budget and allocate your finances correctly. Prioritise your accommodation, monthly groceries, transport, data costs, saving, investing, and having the right insurance. Don’t prioritise eating out and partying all the time.
• As much as the first thing that you want to do is buy a fancy car, don’t jump into buying it as a young professional. Rather try to build up a small nest egg while you build a credit score and cultivate the discipline of managing your money effectively. If you really do need to buy a car, rather be conservative about how much you can afford and remember to include all the other costs, such as insurance, fuel, and maintenance.
• It is important to decipher between needs and wants, or necessary and unnecessary credit.
• Build a good credit score. Make sure you take a credit limit that you need and can afford. This also comes with being responsible and disciplined, as it will help with a better rate on a home loan and vehicle finance. Also avoid missing any debit orders, as this will impact your credit score and long-term wealth creation.
• Start with building on your emergency fund – work towards 1 but ideally 3 months’ worth of income. This will buffer you from unforeseen expenses in future.
• Start putting away a little bit towards your long-term goals, be it buying a home, furthering studies or even retirement. With time on your side, you can truly leverage compound interest and the compounding effect.

mashabas@sowetan.co.za