Managing your finances for the first time can be overwhelming. With daily expenses, housing and health care, heavy debts and long term goals – you might feel that saving for your ridiculously distant retirement isn’t worth it.
But it is!
The sooner you start making a financial plan for yourself, the brighter your future will be.
But here’s the dilemma…
Do you save or do you pay off your debt?
Paying debt and saving money are both very important financial goals. They’re also steps you have to take to reach a bigger life goal — living well during retirement. You want to go into retirement debt-free, but focusing on debt repayment now could mean you have to sacrifice your retirement savings.
The Problem with Paying Debt Only
If you pay your debt first and put no money in savings, then you have nothing but your credit cards to fall back on if there’s a financial emergency.
Unfortunately, you can count on some type of expense coming, and it’s usually when you least expect it. Using your credit cards to fund an emergency only makes it harder to pay off debt.
And the Problem with Saving Only
On the other hand, if you save first and don’t focus on paying down your debt, you end up wasting money on credit card interest. Since credit card interest rates are often higher than savings interest rates, you end up spending more money on debt interest than you earn on your investment.
The other problem with saving first is that you risk entering retirement with debt. You may find that you can’t live comfortably on your retirement savings and keep paying your debt.
Ultimately, you should find a balance between the amount you spend on debt and savings each month. It isn’t wise to put off either of these in lieu of the other so come up with a way to split your money between the two.
Here are a few more things you can do in your twenties to take control of your finances:
1. Establish a budget.
Once you’re bringing home the bacon, you’ll have to figure out how to slice it up. Without a budget, you risk overspending on optional items and under saving for important things.
2. Get insured.
As an adult, you are responsible for protecting yourself and all your stuff. When horrible things happen to you—say, a trip to the emergency room or a fire in your apartment—insurance may save you from forking out thousands of rands all at once.
3. Develop Your Financial Knowledge Base.
Some twentysomethings get lucky – they have a parent or a family friend who has shown them how to get the most out of every rand that comes their way.
But most people feel totally overwhelmed in their early career years and have to piece everything together as they go along.
So get to work! With the understanding that time is money and you’re in your twenties (and therefore rich with time), start building a financial knowledge base so that you can maximise every rand that comes your way.
4. Challenge Yourself to Stop Spending.
Another way you can increase the amount you save each month is to challenge yourself to stop spending money in a different category each month. You may even go extreme and stop spending money completely for a month except for groceries and transportation to get to work. The good thing about these types of challenges is that they are relatively short, (just a month!)
This means you can make the sacrifices for just a short amount of time. It allows you to recognise areas, where you can get by without spending at all – or areas where it may be easy to cut back on the amount you spend each month. These challenges can also help you drastically cut your spending if you need to raise cash quickly.
Your 20s are an exciting time: you create career opportunities, build relationships and embrace new financial responsibilities. The sooner you master those responsibilities, the closer you are to financial independence.
If you want to watch your wealth grow, but your debt is spiralling out of control contact us and we’ll get you back on track.