So you’ve just started your first formal job, and pocket money and cheap booze are a thing of the past. (What happens in varsity, stays there, right?) You’ve got your first pay cheque, and it’s more money than you ever thought you’d see in your account, so it’s time to start living your best life, right?
Well, hell yeah, but let’s not be reckless.
Saving in your early 20s is actually where building wealth begins. We hear about saving and that it’s “important for your future”, but we don’t know how to get down to it properly or whether our methods are even effective.
Piggy banks are for the kids, so let’s talk about saving and spending in your 20s.
How do I save?
Petri Redelinghuys, a trader and founder of Herenya Capital Advisors, says a common saving mistake that 20-somethings make is to spend everything once they get their first pay cheque without putting anything away, because saving for the future or retirement is the last thing on their minds. (#guilty)
Saving money and spending money go hand in hand. The less you spend now, the more you save and the more you save at an earlier stage, the more you can spend later.
“The saving that you doing now is for retirement; you might not think about retirement because it’s far away,” he says.
Simon Brown from JustOneLap says reckless spending during the early 20s is normal but, like Redelinghuys, he emphasises that starting to save early will have the greatest impact on your future funds.
The first part of the savings saga is to start saving from the very first day. Thulisile Nkomo, a private wealth manager at NFB Private Wealth Management, concurs that saving needs to start from day one. Step two is sitting down and planning what money goes where, considering where your priorities lie and not spending more than you earn.
Saving should not be that much of a challenge, says Redelinghuys. If you’ve just started working and most of your disposable income goes towards rent, petrol, groceries and recreational use, spending might be the issue. He challenges someone in this situation to take R200 out of their monthly spending.
“You’ve always got money to save. Create a spreadsheet, and work out what you’re paying for rent, where are the rest of your expenses and see how much disposable income you have left.”
If you spend R50 less on daily expenses like food, your cellphone bill, clothing and going out, you can save R200 a month, which you can put into a tax-free savings account [TFSA], for example,” says Redelinghuys.
Saving for a purpose
Along the way, there will be things you want to own or experience that cost a lot more than what you have in our bank account, for example, going on a holiday or attending a music festival. Keep a separate account for those savings. Further, advises Redelinghuys, “get a side hustle” – use a hobby and make money from it.
“Side hustle for your holidays. It’s motivating when you know that you just need to work this many weeks and you’ll have your ticket to go overseas,” he says.
There are many options available, but it becomes the individual’s personal responsibility to research and educate themselves on those best suited for their own needs. Nkomo says often the individual themselves need to set visions for what they would like to save for or invest in, and see how much they can afford to save.
“You must save as much as you can afford to save,” she says.
According to her, a TFSA or a unit trust is the best account to save with. A TFSA enables you to save and benefit from the growth of your savings, investments and dividends because no taxes are deducted.
Brown says the key is to start putting your funds in accounts that will help your money grow. “Start with ETFs [exchange-traded funds] and with TFSAs. They are simple; they are cheap; they generate returns much quicker.”
ETFs give you returns faster. Simply put, an ETF is an index fund that tracks commodities, bonds and asset baskets. An ETF can be bought or accessed via the JSE. As an index it aims to provide investors with a benchmark return at a lower cost. The ETF asset basket is beneficial because of its diverse portfolio, which can give you access across different currencies and has a lower risk, says Brown.
He says even if you invest a small amount, like R100, it’s important to think about building a portfolio and start investing that money for the next 30 or 40 years.
The whole point of saving for a rainy day or for the long term is to keep the money where it’s difficult to access. The easier it is to access on demand, the easier it will be to spend. Keeping the money in something like a TFSA will only be of benefit to you in the long run.
Short- and long-term options
You have short- and long-term savings options, adds Nkomo.
Short-term savings options are for small items, like a TV, or dope headset or laptop. They cost money, sure, but it is money that you can afford to “lose” because it can be recovered over a short time. This can be invested in cash, in a money-market account, where there’s low risk and the funds can be accessed easily.
Investing for the long-term, like for a house or a really expensive holiday takes time; it may take five to 10 years to accumulate the money. That’s where you begin saving in shares and keeping your money safe, because these are high-risk investments – basically lots of money that you can’t afford to lose.
Ultimately, the lesson is in understanding money, your goals and your personal vision of how you would like to see your own money grow.
In summary, if you’re an average 20-something without many commitments, you can afford to take risks and make mistakes because the money you lose can be recovered. Take the risks, because the growth in your salary is inevitable over time, and the money you make now will grow in the future.
But remember, maintain a good credit rating and stay clear of debt.