The top five financial mistakes young people make – and how to avoid them
By Idris Seedat, Manager: Investment Challenge at the Johannesburg Stock Exchange
Venturing forth into the ‘big, bad world’ as an adult is exciting, daunting – and expensive.
Not only will you find yourself suddenly having to pay for things like accommodation, food, transport and fuel and a host of other costs you never had to worry about previously, but also that your hard-earned cash doesn’t go nearly as far as you’d like.
The reality is that life is expensive and many young adults find themselves being brought down to earth with a bump when they discover just how pricey it can be. The problem is that many young adults are simply not equipped to make smart financial choices and end up making all-too-common mistakes that can cost them dearly in the long run. Here are some of these common mistakes and how you can avoid them.
This is not meant to be financial advice; there are professionals who can plan your financial future for you, but rather some tips and thoughts on becoming more money savvy.
1. Having – and sticking to – a budget is key
You’ve probably heard this before, but preparing and sticking to a budget is an essential financial tool. If you don’t know how much you have and how much you’re spending, you’re heading for trouble. Start by building a ‘snapshot’ of your monthly costs and income. Be honest about what constitutes a necessity or an indulgence and if you really want that big ticket item, set up a debit order to help you save for it over time. Ultimately, if you know exactly how much you are earning and how much you are spending and on what, half the battle will be won.
2. Do you want it, or do you need it?
The temptation to indulge and buy the latest gadget, phone or outfit is hard to resist for many, let alone young adults branching out into life for the first time. However, before splashing out ask yourself: “Do I need it, or do I want it?” Unfortunately the answer may not be what you want to hear but it’s probably the right one. You may also find that you’re simply trying to keep up appearances or are buying impulsively. Either way, chances are it’s not really worth putting yourself in a financially vulnerable position for the latest, and probably fleeting, fad.
3. Don’t do debt
Many countries are in an awful lot of trouble because of debt. The same is true of many people. While debt has its uses, such as in the context of first car purchase, it can quickly become a serious problem if used for frivolous expenses or if accumulated too quickly. If you have more than one credit card to pay off per month, pay off the highest interest credit card first and then close the account. By closing an account, you won’t be tempted to juggle your costs between multiple credit cards.
4. Save, save, save
South Africans are not known for their saving habits and as a result often use debt to cover their day-to-day needs. However, the sooner you start to save, the longer your money has to grow. There are a variety of options for short, medium and long term savings. There are a number of saving options available to young people – depending on your requirements including how long you want to save for and also how quickly you want access to your money. In terms of long term savings and investing, young people can also consider higher risk products that provide higher returns in the long run but may exhibit losses in the short term.
5. Investing is “not for me”
While retirement and investment portfolios may seem like things that you don’t need to worry about right now, the sooner you begin to save for your old age or to put away money for a property deposit, the better. There are a number of financial vehicles available to help you achieve your money goals – both short and long term. However, you don’t need to figure everything out on your own. An independent financial advisor will be able to guide you and help unpack the different products that are available.
If you want some practice at saving and investing with virtual money, consider signing up for the he JSE Investment Challenge. This online game allows university and school teams to invest an imaginary sum of R1-million in JSE listed shares from March through to the end of September. You can sign up at any time during the duration of the competition. Each month, the teams’ performances are tracked and prizes awarded. The Challenge wraps up with a grand prize ceremony in October.
For more information about the annual competition and how schools and universities can take part, visit: schools.jse.co.za or university.jse.co.za.