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5 Financial Tips Young People Must Know

Financial freedom is not a myth. While it can be difficult to start thinking about your retirement when you’ve just entered the workforce, it’s never too early to start planning for your future. 

But it’s important to start.

Our advisors suggest that these are the top 5 financial planning tips that every young South African should know and work towards. 

1. Pay off your debts 

When you start earning money, one of the first things that happen is that you’re eligible for credit. Sure, on paper you’re able to meet the minimum required payments for this, but it can quickly spiral out of control, leaving you with even more debt. 

So, one of the first tips is to pay off existing debt - however, not all debts are equal.

It’s important to remember that all debts have an interest rate attached to them - that’s how lending institutions make their money. Some rates are high and some are low, so when you’re deciding which debts to pay off, you must review their respective interest rates first. 

Review of the interest rate

If the interest rate of the debt is higher than what you would get from putting your money into a saving account, pay this debt off as soon as possible. 

However, if the interest rate of the debt is lower than the interest you would get with savings, you can keep up with your minimal monthly payments and not have to rush to pay this debt off. 

For example; an NSFAS normally have a fixed repayment term attached to them and a low-interest rate, so you can hold off paying this debt off. 

Once your debt is under control, you can start planning for emergencies.

2. Start an emergency fund

The saying ‘anything can happen’ is scarier than you anticipate, but an Emergency fund creates a security blanket for you to help with these unexpected circumstances.

These emergencies can include - 

  • Being retrenched
  • Buying new tires for your car
  • Needing to relocate for work 
  • Unexpected, small doctors bills

An Emergency Fund should cover approximately 3-6 months of your main monthly expenses. This can be achieved quite easily, especially if you don’t have large repayments like a home loan.

Benefits of this saving

This access to money gives you the freedom and flexibility to tackle emergency spending without having to build additional debt or worry about where your next paycheck is coming from.

Most importantly, this money must be saved in the right place - such as a savings account - that you have easy access to. An account that is low risk and has good returns above inflation means that your savings can earn a little extra. 

3. Set up a safety net 

Financial protection in the long term is vital. 

We’re not invincible - but when you’re young, it’s easy to think that we are. But remember anything can happen, and it’s important to be prepared. 

Imagine that you’re not able to work because of an illness or disability? How would you make ends meet or support those who are dependent on you? There are insurance options available that cost a small amount per month but are definitely worth it if it means protecting your loved ones. 

Insurances we recommend are:  

  • Income protection

Your largest asset is your future earnings. If you’re unable to work due to unforeseen circumstances, you won’t be able to pay your bills, support your family or achieve your goals. Now, depending on your situation and the type of cover, your income protection insurance covers you until you’re able to work again or until you retire. 

  • Critical illness cover

If you become disabled, injured or incapacitated, adjustments that need to be made to your home and/or lifestyle - e.g. carers, ramp installations or other disability aids - need to be met, but many of these costs are not covered by medical aid. Critical illness cover means that these bills won’t be coming out of your pocket. 

  • Life insurance 

If you have family members or children that are financially dependent on you, life insurance cover means that they’ll be taken care of in the event that something happens to you. 

4. Save for retirement 

No one wants to work forever. 

While the retirement age is 65, most young people want to retire before then. However, this requires accruing a retirement income that supplements your income when you’re no longer working. 

How to save for retirement

People in their 20s should start putting away approximately 17% of their annual income into a retirement annuity (RA) fund. These accounts compound - aka; earn money - over time so the earlier you start saving, the better. 

Your retirement annuity means that you also receive tax rebates which can go towards other goals like a vacation or payment towards a vehicle. 

Unless you’re retiring now, the important thing to remember is; do not touch this money! If you do then you need to start saving from the beginning and incur certain tax penalties as a result. 

Sure, you might not be making a lot of money at your first job and affording specific amounts can be difficult but remember this - No amount is too small. You can always increase your contributions as your financial circumstances change. 

5. Have a financial plan

It’s easier to achieve your goals when each step is planned accordingly. While it’s impossible for everything to go in line with your expectations, financial planning keeps you focused and protects you from making mistakes. 

As part of this some tips to remember include -

  • Knowing your goals exactly
  • Sticking to your monthly budget 
  • Identifying where you can save more
  • Avoid dipping into your emergency fund
  • Save what you can, where you can

Financial Advice in South Africa

The best way to start working towards a financial future you deserve is to seek assistance from a professional. LifeCheq is an innovative FinTech company founded on the belief that financial advice should always have the human at the heart of it.

Our AI-powered tools and platforms have been designed with you in mind because every detail of your journey matters. Most importantly, we partner with financial advisors and institutions that you know and trust to deliver our impactful advice and solutions.  

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