Nomi Bodlani reflects on common personal finance and investment mistakes investors tend to make in their 20s. If you can avoid these, you can better position yourself for financial success in your 30s and beyond.
I remember looking at my very first payslip and being completely shocked that the take-home salary, around which I had been excitedly building my grown-up budget, had been whittled down by nearly 30% due to what a kind colleague in the human resources department later explained were “benefits”. But how are they really benefits if I’m in fact paying for them?
This was my first introduction to the cost of tax, medical aid and pension contributions.
That first payslip became a crash course in adulthood; along with the sweet taste of my first earnings came the realisation that there would also be a last pay cheque, and if I was fortunate to live long enough, years living as a pensioner thereafter.
One of the most important financial truths I confronted on that day, and that has been reinforced countless times over the past decade, is the fact that, like so many facets of life, decisions we make in the present have an impact on our financial future. We hold the power today to influence how things will turn out.
If I could offer my 20-something-year-old self some advice, these are the money mistakes I would tell her to avoid:
Mistake 1: Believing that you’re too young to concern yourself with retirement-related matters
The reality is that you do need to think about saving for retirement – the sooner the better. When I was in my 20s, the idea of retirement felt rather abstract and it was only until I made it real for myself that I understood the actions I needed to take. One way of making it real is to truly understand exactly how much you need to be saving for retirement and how the age at which you start saving impacts this.
A simple fact that many don’t understand is that while your working life lasts approximately 40 years, the income you earn in those 40 years must provide for your needs, not only during the 40-year period but also, for a further 20 or so years that you could live as a pensioner. Therefore, the more you delay saving for retirement, the larger the proportion of your present-day income you need to put away in order to secure your needs during retirement.
While I did not intentionally delay saving for retirement (in most work environments, it is compulsory), I did make another grave mistake by accessing what I had already saved. This leads me to the second common mistake young professionals make.
Mistake 2: Not preserving your retirement savings when you change jobs
Whenever you resign from your job, or in the unfortunate case that you are retrenched, you will typically have an opportunity to access the retirement funds that you had saved through your employer’s retirement or pension fund; try not to do it.
If you do not preserve these funds in a retirement product, you essentially start saving for retirement all over again. I did, and I found myself in the very uncomfortable position of having to find a way to put away 20% of my income for retirement. The older you are when you start, the more money you will have to put away. Imagine having to save 40% to 60% of your income for retirement at a time in your life when your children are attending high school or completing tertiary studies? That is how much you would need to save if you started between 40 and 45 years of age!
However, if you find yourself in a position where you need to make use of some of the retirement funds available after you leave your job, withdraw only as much as you need and avoid the temptation to take as much as you can. This will also help avoid being heavily taxed if you exceed SARS’s tax-free withdrawal thresholds.
Mistake 3: Relying too much on debt to meet present day needs
Very few of us can afford to fund the big and important things we value or want to pursue in life from our salaries alone, and this is where debt usually comes in. Debt isn’t necessarily a bad thing, if used appropriately, but the cost of servicing debt can eat away at our ability to build wealth over the long term.
Debt can be useful, but it is important to understand your options and plan ahead, so that you can leverage time to your advantage and earn interest rather than pay interest. When taking on debt, make sure it is for an investment and something that will actually give you benefits over time. I’ve used debt to go on holiday and it cost me more than if I had saved. Unlike a property investment for example, a holiday doesn’t give you much benefit over time.
Debt allows you to borrow, at a cost, from the future to meet a present need, while investing allows you to borrow from the present to meet future needs and build wealth over time.
Mistake 4: Not talking to your family about money
Like many South Africans who were “raised by a village”, I understand the significant sacrifices that were made to educate me, so when I started working I felt, quite naturally and without resentment, a huge sense of responsibility to join the village elders and do some raising myself.
As well intentioned as you may be, providing financial support to relatives can put a lot of pressure on young professionals and this is why I suggest setting realistic expectations about the level of financial support you are able to provide. In my 20s, I didn’t know how to do this and often found myself overwhelmed and taking on financial responsibilities that, in retrospect, I couldn’t afford.
I believe in having open conversations with your loved ones about financial circumstances (yours and their own) to ensure that everyone is on the same page and that you all understand the plan. This will also minimise the financial strain of unbudgeted costs that tend to arise.
Mistake 5: Going at it alone
Finances are very personal, and as such, we often feel it is wholly our responsibility to figure it out. While it is our individual responsibility, that doesn’t mean you should wing it or that you can’t enlist the guidance of a professional. I completely messed up my taxes at one point while working as an independent contractor and thinking I could figure it out on my own. It was only after seeking professional advice that I could resolve them.
A good independent financial adviser is not only going to help you set your financial goals, but also put a plan in place to achieve them. Similar to being open with your family about your circumstances, your financial adviser can support you better when they understand not only your financial goals but also the challenges you face in achieving them.
Use your experience to your advantage
One of the best parts about being in your 30s (in my opinion) is that, while you may not have all the answers, you know a lot more about yourself and what you want in life than you did in your 20s. Leverage these experiences to set meaningful short- to long-term financial goals – whether it is securing your children’s future, buying a home, saving for a comfortable retirement or saving for an emergency. Once you have your goals in mind, you can make a plan, with the assistance of an independent financial adviser, if necessary, to get there.
Knowing yourself better means you are also better able to understand your triggers and the kinds of obstacles that can prevent you from sticking to your plans. Think about whether there are any systems that have helped you succeed in other areas of your life, that you could apply to achieving your financial goals. Perhaps you do better when there is social accountability, so making these plans with your partner might be all you need; or it might be that you could benefit from joining an investment club. Do what works best for you. For me, it’s doing the maths and understanding exactly what I need to do and when everything is in order, to reach my long-term goals.
If I could relive my 20s, I would make sure I understood just how valuable time is to your long-term financial goals and that in the context of investing, time, if you have it, is free. The earlier you start saving for your retirement, the less you need to save from your current income.