Steps to take in your 20s to build sustainable wealth

One’s 20s can serve as a critical juncture to lay the foundation for sustainable wealth creation. From mastering the art of budgeting and cultivating a savings mindset to navigating investment markets and insuring against one’s financial risks, this article aims to give practical insights to twenty-somethings intent on creating lasting wealth.

Make budgeting a habit

Budgeting is habit forming, and learning to use a budget early on in your career will help create excellent money habits for the rest of your life. Remember, while you are young, single, and your finances are relatively uncomplicated, budgeting is likely to be a fairly simple exercise. As your personal circumstances change and become more complex, so too will your budget. Our advice, therefore, is to start your budgeting journey sooner rather than later to ensure that you are well-equipped for times when your finances require a more complex budgeting system.

Commit to consistent investing

As trite as this may sound, investing a portion of your first pay cheque towards your future self is one of the most empowering things you can do in your 20s. Most twenty-somethings are far too young to contemplate retirement, so consider removing the word ‘retirement’ from your vocabulary and replacing it with ‘financial freedom’, then spend time determining what financial freedom looks like for you.

Create an emergency fund

Lack of adequate emergency funding is often the reason that people find themselves in debt. Take stock of your personal circumstances, income and expenditure, and then determine a level of emergency funding that you feel comfortable with. It really doesn’t matter where you choose to house your emergency cash, although our advice is to keep it in a separate account that is specifically earmarked for these purposes. Merging your emergency cash with the rest of your money may make it tempting to dip into your reserves, so be deliberate about finding a safe place for your emergency cash.

Establish a solid credit history

For the rest of your life, you will rely on your credit record to obtain financing, and it is absolutely essential that you start building a good credit history in your 20s. Being able to obtain vehicle and property financing will depend on your credit score, so be very cautious when buying anything on credit. Any late payment or default will negatively impact your score, so if you do have credit, be religious about making your repayments in full and on time every time.

Pay cash

Purchasing goods, especially high-cost items, with cash is not always achievable, especially if you have just started your career and your earnings are low relative to your earning potential.

However, when it comes to funding your living costs, be sure that you are able to pay cash and that you do not need to incur debt in order to survive. Using debt to fund your month-to-month living expenses is not sustainable and will result in creating a debt spiral that is difficult to escape.

Avoid buying too much car

Avoid the temptation of buying more car than you need, even if you have the disposable income to do so. Instead, opt for a reliable and functional vehicle that will serve your needs and keep you safe on the roads. The value of vehicles depreciates at a rapid rate, and buying more car than you need will leave you paying premiums and interest for a high-cost item that is no longer worth what you paid for it, with its value constantly reducing as time goes on.

Join a medical aid

Once you become financially independent, you will need to move off your parents’ medical aid and join a medical scheme in your personal capacity. Ideally, ensure a smooth transition onto your new medical aid with no break in membership, and this will ensure that no waiting periods or exclusions are applied.

Protect your income

While you are young, your future financial independence will depend on your ability to generate an income and save for the future. As such, making sure that your income is protected in the event that you become temporarily or permanently disabled is an absolute must. While you are young and healthy, insurance cover is relatively affordable, so it is advisable to take out risk cover as soon as you begin earning.

Without comprehensive disability cover in place, it is likely that you would become a financial burden on your loved ones should you be rendered unable to work — even for a short period of time.

Get organised

Begin collating all legal and financial documentation that you may require for the purposes of applying for financing, filing tax returns, or setting up investments. Be sure to include documents such as a copy of your employment contract, proof of address, ID and passport, bank statements and bank account confirmation, proof of your qualifications, and birth certificate.

Understand your employee benefits

If you’re fortunate enough to enjoy group benefits through your employer, it generally always makes sense to take advantage of them. Generally speaking, group life and disability cover is much more cost-effective than taking out personal life cover. Further, if you have the opportunity to contribute to an employer’s retirement fund, you will enjoy the added convenience of having your premiums deducted directly from payroll and benefiting from the significant tax benefits of doing so.

Spend less than you earn

Learning to live within your means is not just about spending less than you earn. It’s about spending less than you earn after you’ve taken care of your future financial independence. If you’re spending in line with your earnings but are not investing money for your future, you are effectively spending your way into future poverty.

Pay yourself first

Paying yourself first means managing your finances in such a way that you prioritise yourself — both your current and future self — in all decisions that you make. The costs of doing business as a young person include being able to produce a good credit score, showing proof of a well-managed bank account in your own name, being able to provide proof of earnings, being in good standing with Sars and having access to your FICA documents.

Keep building your resumé

Keep your CV continuously updated, and be sure to include all certificates, qualifications, and diplomas that you accumulate along the way. As you get caught up in your career, you may end up forgetting the various courses, workshops and training that you attend, so make a concerted effort to save all such records and use them to bolster your CV.

Know your financial personality

Spend time understanding your relationship with money, how you feel about debt, what your money value system is, and what your spending habits are. Early identification of what drives your financial behaviour is hugely valuable and can help you identify problems before you potentially succumb to poor decision-making.

Retain your financial independence

It is never ideal to become financially dependent on someone else or to rely on another person to fund your financial future, even if you believe that you and your partner or spouse have committed to being together forever.

Not only can it result in a shift in relationship dynamics, but it can leave you financially vulnerable if the relationship comes to an end, either through death or divorce.

Have a financial plan

Ideally, find an independent financial advisor who can work with you to develop a malleable financial plan that can be changed and updated as your personal circumstances and finances change. Use the opportunity to list a set of short-, medium-, and long-term goals that you can visualise and use as the basis for starting your financial planning journey.

Know how investment markets work

Be intentional about educating yourself about investing, investor behaviour and the various investment vehicles available to you so that you fully understand the power that compound interest holds on your financial future. Reading and remaining up-to-date with the investment industry will not only help you make appropriate investment choices but will also reduce your chances of falling for investment scams.

Invest aggressively

With youth being on your side, be careful not to invest too conservatively if you’ve taken a long-term view of your investments. An investment portfolio that is too conservative and doesn’t include sufficient growth assets can result in your invested capital losing value in real terms over time.

Choose your life partner wisely

Money is the number one source of conflict in most relationships, so make sure you choose a partner who shares your money values and is committed to building a financial future together as a team.

Forming a partnership where one team member is chasing a different set of goals and has a conflicting value system when it comes to money is likely to be a constant source of conflict and stress in your relationship.