Financial Wellness From the First Paycheck: Steps to take in your twenties that can secure your financial future – Part 1
It’s important to start good financial habits as soon as you start earning an income. Starting out with a mindful attitude and actively planning your finances will help you set up your finances for life. Here are the first 10 steps to get started:
1. Set up a budget
Budgeting is habit-forming, and learning to use a budget early on in your career will help create excellent money habits for the rest of your life. Remember, while you are young, single, and your finances are relatively uncomplicated, budgeting will be a fairly simple exercise. As your personal circumstances change and become more complex, so too will your budget. Our advice is therefore to start your budgeting journey sooner rather than later to ensure that you are well-equipped for times when your finances require a more complex budgeting system.
2. Start investing with your first paycheck
As trite as this may sound, investing a portion of your first paycheck towards your future self is one of the most empowering things you can do in your twenties. Most twenty-somethings are far too young to contemplate retirement, so consider removing the word ‘retirement’ from your vocabulary. Motivation for investing may come from dropping the word ‘retirement’ from your vocabulary and replacing it with ‘financial freedom’, and then spend time determining what financial freedom means for you personally.
3. Build up an emergency fund
Lack of adequate emergency funding is very often the reason that people go into debt. Take stock of your personal circumstances, your earnings and your expenditure, and then determine a level of emergency funding that you would be comfortable with. It really doesn’t matter where you choose to house your emergency cash although our advice is to keep it in a separate account that is specifically designated for these purposes. Merging your emergency cash with the rest of your money may make it tempting to dip into your reserves, so be deliberate about finding a safe place for your emergency cash.
4. Build a good credit history
For the rest of your life, you will rely on your credit record to obtain financing and it is absolutely essential that you start building a good credit history in your twenties. Being able to obtain vehicle and property financing will depend on your credit score, so be very cautious when buying anything on credit. Any late payment or default will impact negatively on your score so, if you do have credit, be religious about making your repayments in full and on time, every time.
5. Pay cash
Purchasing goods, especially high-cost items, with cash is not always achievable especially if you have just started out your career and your earnings are low relative to your earning potential. However, when it comes to funding your living costs, be sure that you are able to pay cash and that you do not need to incur debt in order to survive. Using debt to fund your month-to-month living expenses is not sustainable and will result in creating a debt spiral that is difficult to escape.
6. Buy a reliable, functional car
Avoid the temptation of buying more car than you need, even if you have the disposable income to do so. Instead, opt for a reliable and functional vehicle that will serve your needs and keep you safe on the roads. The value of vehicles depreciates at a rapid rate and buying more car than you need will leave you paying premiums and interest for a high-cost item that is no longer worth what you paid for it, with its value constantly reducing as time goes on.
7. Become a member of a medical aid
Once you become financially dependent you will need to move off your parents’ medical aid and join a medical scheme in your personal capacity. Ideally, ensure a smooth transition onto your new medical aid with no break in membership and this will ensure that no waiting periods or exclusions are applied.
8. Take out disability insurance
While you are young, your future financial independence will depend on your ability to generate an income and save for the future. As such, making sure that your income is protected in the event that you become temporarily or permanently disabled is an absolute must. While you are young and healthy, insurance cover is relatively affordable, so it is advisable to take out risk cover as soon as you begin earning. Without comprehensive disability cover in place, it is likely that you would become a financial burden on your loved ones should you be rendered unable to work – even for a short period of time.
9. Get your financial documents in order
Begin collating all legal and financial documentation that you may require for the purposes of applying for financing, filing tax returns, or setting up investments. Be sure to include documents such as a copy of your employment contract, proof of address, ID and passport, bank statements and bank account confirmation, proof of your qualifications, and birth certificate.
10. Take advantage of your employee benefits
If you’re fortunate enough to enjoy group benefits through your employer, it generally always makes sense to take advantage of them. Generally speaking, group life and disability cover are much more cost-effective than taking out personal life cover. Further, if you have the opportunity to contribute to an employer’s retirement fund, you will enjoy the added convenience of having your premiums deducted directly from payroll and benefit from the significant tax benefits of doing so.
For more tips, read Five steps to secure your financial wellbeing
Contributed by MoneyWeb
Written by Gareth Collier – Crue Invest (Pty) Ltd