By Angelique Ruzicka, editor, Justmoney
Generally people think that they make the most money mistakes in their twenties. While young people do make bad decisions that equate to throwing money down the drain, critical errors can also be made in later years. Seniors blow retirement savings on fancy cars and luxury holidays while some people in their 40s put off saving for retirement for ‘here and now’ purchases.
Schalk van der Merwe, area manager at Nedbank Financial Planning, Nedbank Wealth provided Justmoney with a broad breakdown of the spending habits of different South African age groups, with simple advice to change behavioural patterns.
18- to 25-year olds: Irresponsible debt phase
Mistake: You generally take on too much debt - financing a new lifestyle, as opposed to earning it, predominantly using credit to study, pay for a car and to fund the party packed weekends.
Advice: “Starting to save early on in life 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, savings account etc.
25- to 35-year olds: Good longer-term debt phase
Mistake: You don’t settle down early enough and spend potential savings on big car loans.
Advice: “Generally, incomes are at levels to take on "good long-term debt" like home loans. The difference between good and bad debt needs to be more clearly understood,” says van der Merwe. Consider taking on good debt (debt for things that will add value to your life). Generally, houses appreciate while cars depreciate in value soon after you drive them out of the show room floor. Rather invest in getting onto the property ladder than buy that flashy car you’ve always wanted.
35- to 45-year olds: Serious savings phase
Mistake: You still think that there’s enough time to save for your retirement so when the opportunity comes to cash in your pension fund because you took on a new job or lost your job through retrenchment you start a new business venture or use the money on a holiday.
Advice: “You need to apply more realistic thinking 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. You won’t be able to do it soon anyway as new laws will force you to reinvest your retirement money. So why not rather instil some discipline now?
45- to 65-year olds: Silly debt phase
Mistake: With the children ‘kicked’ out of the house you feel you are entitled to a bit of pampering and luxury. Ladies spend money at the massage parlour while the guys buy that classic auto they’ve always desired. But this is hardly the time to gamble with your savings.
Advice: “That disposable cash should be able to work for their future goals,” says van der Merwe.
65- to 85-year olds: Low debt phase
Mistake: You suddenly realise that you’ve been splurging too much. You clamp down and become a conservative old biddy that winces every time you have to pay for a bus ticket. But your conservative outlook backfires and you don’t keep track with inflation, which means your money doesn’t stretch far enough to meet your expenses.
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 the right way to beat inflation. Remember, while you save on no longer having a mortgage, things like medical aid will be expensive. Generally, medical aid premiums go up every year above inflation so you need to factor this in.
Van der Merwe advises South Africans across all age groups to adopt some form of long-term savings plan. “Every person should have a short, medium and long-term strategy in order to reach individual goals,” he says. “The key is to set goals. A good financial plan, clear objectives and discipline will determine how responsibly individuals manage their savings agenda.”