Although many of us equate financial mistakes with the inexperience of youth, research indicates that financial failures can happen at any age.
Schalk van der Merwe, area manager at Nedbank Financial Planning, provides us with a breakdown of South Africans’ spending habits in various age groups, with simple advice for changing poor patterns.
18- to 25-year-olds: Irresponsible debt phase
Mistake: Generally take on too much debt, such as financing a new lifestyle as opposed to earning it, and predominantly using credit to study, pay for a car and/or fund party-packed weekends.
Advice: “Starting to save early on is the best choice to reap the full benefit of compound interest,” says Van der Merwe.
Think about opening a savings vehicle of some kind such as a unit trust or a savings account.
25- to 35-year-olds: Good longer-term debt phase
Mistake: Don’t settle down early enough, and overspend potential savings on car loans.
Advice: “Generally, incomes are at levels to take on ‘good’ long-term debt, such as home loans. The difference between ‘good’ and ‘bad’ debt needs to be understood,” says Van der Merwe.
Good debt is accrued for items that will add value to your life. Generally, for example, houses appreciate in value, while cars depreciate soon after you drive them off the showroom floor. Rather get onto the property ladder than buy that flashy car you’ve always wanted.
35- to 45-year-olds: Serious savings phase
Mistake: Still think that there’s enough time to save for retirement. When the opportunity comes to cash in a pension fund, this is used to fund a new business venture or a holiday.
Advice: “Think realistically about the value of your current asset base and what it will be worth in the future,” says Van der Merwe.
While taking money out of your pension pot may seem enticing, rather restrain yourself and reinvest the money.
45- to 65-year-olds: Silly debt phase
Mistake: May feel entitled to some pampering and luxury, with children having left home. Ladies spend money at day spas while men buy the classic auto they’ve always wanted. But this is hardly the time to gamble with savings.
Advice: “That disposable cash should be able to work for your future goals,” says Van der Merwe.
65- to 85-year-olds: Low debt phase
Mistake: Suddenly realise they’ve been splurging too much. A conservative outlook can backfire and may not keep up with inflation.
Advice: “You have to understand personal cash flows vs. your life expectancy needs,” says Van der Merwe.
Speak to a financial advisor to make sure you are investing your money in an inflation-beating facility. Remember, while a paid-up mortgage may enable you to save, medical aid will become more expensive. Generally, medical aid premiums increase above inflation, so you need to factor this in.
Van der Merwe advises all South Africans to adopt a savings plan, and stick to it.
“Every person should have a short-, medium- and long-term strategy in order to reach individual goals,” he says.
“A good financial plan, clear objectives, and discipline will determine how responsibly individuals manage their savings agenda.”