Most of us start our careers in our early twenties and plan to earn an income for about four decades before reaching retirement age. Along the way we will encounter a range of life-changing experiences, which may include births and deaths, marriages and divorces, unexpected windfalls, and costly emergencies. Drawing from his own experiences as a young professional, Phiko Peter discusses the importance of laying a firm financial foundation as you start your career to ensure that you can withstand life’s changing seasons and achieve your long-term goals.
Throughout our adult lives, we are tasked with managing our personal finances: We need to strike a balance between what we earn and what we spend. This requires some careful thought around how we earn an income, deliberate action around meeting our immediate obligations, and steps we can take to achieve our long-term goals. Luckily, there are a few things you can do to improve your outcomes. Five of these are discussed below.
1. Plan and budget to manage your expenses and achieve your goals
Many of us enter the working world with financial responsibilities, including student loan repayments and supporting our immediate and extended family members. These responsibilities should be considered alongside your daily expenses, such as housing, food and transport costs. If your income needs to stretch a little further, you may need to defer goals, such as buying a car, purchasing a home, travelling abroad or even starting a family. That said, careful financial planning can help you meet your immediate responsibilities as you make strides towards achieving these goals.
Drawing up a long-term financial plan to help you achieve your short- and long-term goals is a critical starting point. However, even with a plan in hand, achieving these goals is dependent on the daily decisions you make. Complementing your broader plan with a realistic budget can help you stay on track.
Setting a goal without a feasible plan to help you achieve it is effectively just dreaming. It is important to be realistic about all your financial responsibilities and factor them into your financial plan and budget as they impact your outcomes.
2. Think about your future self
We see our future selves as strangers. This isn’t a poetic metaphor; it’s a neurological fact. Studies suggest that when you imagine your future self, your brain does something weird: It stops acting as if you are thinking about yourself. Instead, it responds as though you are thinking about a completely different person. Why would you save money for your future self when, to your brain, it feels like you’re giving money to a complete stranger?
When you first start earning an income, retirement seems incredibly far away, but the reality is your retirement income will need to come from the savings you accumulate throughout your career. Given that only 6% of South Africans can afford to retire comfortably and the pace at which healthcare advances are improving life expectancy, saving for retirement should be a key consideration from the moment you receive your first payslip. If you are hoping to retire at 65, there is a real possibility that you may need to fund your lifestyle for another 30 years. You are effectively working for two salaries – one for now and one for later.
Starting early gives you an advantage: Over time, the power of compound interest increases the growth rate of your savings – making it easier to achieve your retirement goals.
3. Delay your gratification
The desire for instant gratification often leads us to using credit to buy the things we want immediately. While it may be tempting to use your credit card to pay for a holiday or buy an item you have your eye on, the real cost of these items can balloon when you use debt to acquire them. In the same way that compound interest can help you build wealth, it can also work against you if you are overly indebted. Over time, the interest you pay on credit cards and personal loans can destroy your wealth.
Think carefully about the type of credit you take on and whether it will help you achieve your goals or chip away at your long-term wealth.
4. Expect the unexpected
Humans are wired to be optimistic. Optimism bias leads us to believe that we are less likely to experience negative events in the future and that the future is going to be better than the past. Optimism can help us achieve incredible things, but it can work against us: We often make poor financial decisions, because we believe that we will increase our earnings or receive a windfall in the future.
Optimism can also prevent us from making adequate provision for the unexpected hurdles. Financial emergencies will crop up from time to time and, if you are not prepared for them, they can have a lasting impact on your finances. In addition to taking on appropriate insurance as you accumulate assets and financial responsibilities, one of the best things you can do is build and maintain an easily accessible emergency fund. Most experts suggest that you should build an emergency cash reserve equal to the value of at least three months of your monthly expenses.
An emergency fund can be a lifesaver when you need access to money and will help you avoid taking on unnecessary debt or jeopardising your long-term goals by dipping into your savings. This allows you to protect your wealth.
5. Get the right advice
Despite our best intentions, we often get in our own way. Common mistakes we make include investing in or taking out inappropriate financial products and making irrational financial decisions based on our emotions.
Personal finance is personal: There are no one-size-fits-all solutions. A good, independent financial adviser can help you create a financial plan that takes your unique circumstances into account. This includes managing your risks, suggesting appropriate financial products, updating your plan as your circumstances change and keeping you on track and accountable.