’Nimi Akinkugbe
| credits: File copy
| credits: File copy
When
you start to earn, it is so easy to spend without giving much thought
to the future. Unfortunately, financial literacy is not taught in
schools, which leaves young adults exposed and without the knowledge of
how to manage their money when they step out into the workforce or seek
to build their own businesses. If you are a young adult, here are a few
tips that will help to set you on the path to financial security.
The first step in financial planning is
to identify your goals. Your short-term goals might include buying a
car, going back to school, or taking a vacation or getting married. Your
medium-term goal may be to get a mortgage, while your long-term goal
may be to plan for your retirement.
It is very tempting when you first start
earning, and particularly where you have limited financial and other
responsibilities, for you to spend excessively on clothes, accessories,
phone bills and other lifestyle purchases. All the spending can be a
serious drain on your finances.
Even though the concept of budgeting is
over-flogged, it really is the most effective way of keeping track of
your expenses. Create a budget so that you can see exactly where your
money is going. Start by adding up the essentials, transportation, food
and your car loan if you have one. There is the tendency to eat out
often, or pick up take-away meals, or to overspend on clothes and a
lifestyle that you perhaps can’t afford just yet. This is the time to
commit to saving and investing for the future. The key is to live below
your means and spend less than you earn.
Use debt cautiously. It is better to
borrow for things that have lasting value such as your personal
development and education, or to buy property, rather than for clothes
and gadgets. If you are in debt, focus on paying off or at least
reducing the debt with the highest interest. Building a solid credit
history from now with your bank is important. Your employer, family and
friends might also from time to time consider lending you money. Be
meticulous with repayment and don’t abuse this trust. It could be very
important when you need to borrow more significantly for your business
or other needs in the future.
Once your debt is under control, it is
important to build up some emergency savings. Things happen and it is
always important to be prepared for the unexpected and to be able to
sort out emergencies without having to beg or borrow. You could suddenly
lose your job or have an emergency that needs cash. Set a realistic
savings goal and start to save at least 10 per cent of your income in a
bank savings account or a money market mutual fund. Ideally, you should
try to accumulate up to six months’ worth of your living expenses.
Many young people feel that they must
wait until they earn “enough” before they start to save. It will never
be enough. Don’t wait until you have that “extra” money; start now to
begin to set funds aside. No matter how low your salary might be, save
something; even the smallest amounts add up over time. Put a direct
debit in place and automate your savings. The mantra, “pay yourself
first,” involves treating savings as part of your non-negotiable monthly
“expenses” that must be considered before any other expense.
If your responsibilities are relatively
low, and you are earning a decent salary, there is no reason you
shouldn’t commit to saving up to one third of your income. Building
significant savings and investments is the best way to weather difficult
periods and move towards achieving long-term goals such as owning
property or starting your own business.
Historically, the stock market has
out-performed other types of investments over the long term. Most people
do not have the time or the inclination to select individual stocks;
with a relatively small sum of money to invest each month, a stock
market mutual fund may be the ideal investment to meet your long-term
goals.
It may seem odd to talk about your
retirement when you have barely got started with work; naturally, you
will not be focused on the end of your working life which is still
decades away. Even if you work for a small business that doesn’t have a
pension scheme in place, you can make your own voluntary contributions
to your Retirement Savings Account. Remember though that a pension alone
can hardly sustain your standard of living so consider this as just
part of a portfolio of investments, which ultimately should include
stocks, real estate and other assets.
Make an effort to learn about saving and
investing. There is a plethora of information in the media, books,
magazines, newspapers, seminars and the Internet that will guide you as
you make such financial decisions. Seek professional advice so that your
own unique situation can be carefully considered and appropriate
investment choices can be made for you.
Your choice of a life partner is probably
the most significant decision you will ever have to make. It is
important to partner with someone whose moral and ethical values match
yours. While you don’t have to agree on every single financial issue,
compatible goals and values as well as openness and honesty do matter
and will be key as you merge not just your lives but your finances.
Most young people do not make saving and
investing a priority. Yet, the choices that you make when you are young
will play a critical role in your future financial security. Of course
having to save large sums over time comes with some sacrifice in terms
of short-term comforts and indulgences, but it is the only way to get
closer to that ultimate goal of financial security.
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