The road to financial independence is strewn with obstacles, and young people aren’t always savvy enough to know how to deal with them.
Four financial mistakes young people make and how to avoid them
We chatted with four South Africans about money mistakes they made when they were younger, and lessons they have learnt about managing their finances.
Tip: Did you know a tax-free savings account can help you beat inflation while avoiding tax on interest?
Mistake #1: Using credit to overspend
Overusing store accounts and credit cards proved a problem for Rachel Smith, a 50-year-old consultant.
“Financial literacy was not discussed much when I was young, and this was at the heart of my relationship with money,” she says. Getting into debt meant she had to delay saving and investing.
Her advice to young people today? “Pay with cash and start investing and saving earlier. Never underestimate the value of compound interest. It can reward you far more than the latest branded sneakers or bag. Every time you feel the urge to buy something new, ask yourself if you really need it.”
She says it’s essential to engage a trusted financial adviser. “We’re not all financial experts. It’s good to get insight and perspective from an objective person,” she says.
Mistake #2: Neglecting savings
For 40-year-old human capital professional Sanele Zungu, failing to save money has proven costly.
“I didn’t think I had enough money to put away each month, but to be honest, I could have foregone a lot of bought lunches and saved that money instead,” she says. “If you have a mental block because you think you need large sums of money to save, remember that savings accumulate.”
Although she received rental income, she spent it, rather than putting the funds into her home loan. “The intention was to pay more than the instalment to decrease the interest I paid to the bank – but that didn’t happen,” she says.
Her inability to live within her means saw her transferring funds into a savings account but making online transfers into her primary account by mid-month.
“If I could go back, I would redirect rental income into my home loan, and set an entertainment budget to limit my spending,” she says. “I would have my tenants pay directly into my home loan, so I couldn’t access the money without going through the cumbersome process of applying for an access loan.”
Mistake #3: Not preparing for retirement
Learning performance consultant Pregs Pather (53) says his mistake was “not starting a formal retirement fund investment as early as I should”.
He says discretionary investments are insufficient for retirement and recommends that young people start contributing to a retirement annuity (RA) when they start paying taxes.
“The delay in taking out an RA has meant I’ve lost out on tax deductions for the years I didn’t contribute,” he says.
He is contributing to an RA and pension fund to maximise tax benefits. “However, it’s impossible to claim the lost deductions,” he points out.
Mistake #4: Fear, and financial illiteracy
Dhivya Pillai, a 29-year-old researcher, says her biggest mistake has been a fear of money.
“Banks and the financial system are extremely intimidating, and I think financial education in South Africa is generally poor,” she says. “Despite my privilege, my financial literacy is shocking.”
Fortunately, she has time to remedy the situation. “My mistakes haven’t had much of an impact yet, but they will as I get older,” she says. “I’m working hard to overcome my mental block so I’m less scared of the system and can use it to my advantage.”
She recommends young people read as much as they can about finance, and fill educational gaps themselves – but cautions them to be discerning about sources of information. “Not every ‘finfluencer’ (financial influencer) is an expert,” she warns.
Tip: Investing in a retirement annuity confers significant tax advantages. Find out more here.