Welcome to adulting: Here’s what to do with your first paycheck
In celebration of Youth Day
By: Debra Slabber, Director: Portfolio Specialist, Morningstar Investment Management South Africa
In the spirit of Youth Day this June, I’d like to reflect on my younger days and share some financial wisdom that I wish someone shared with me as a young adult.
We are told to start saving as soon as we get our first salary. This is of course done with very good intentions. Not only does it give you a meaningful financial start in life, but it also means that the power of compounding can work its magic in the background over a much longer period.
Unfortunately for most of the young working population there’s not much left to spend, if any after they’ve paid for their basic expenses. And if you are in the fortunate position of having disposable income – you must make a “tough” choice – spend and enjoy now or save for later.
Should you save when you are young at the expense of enjoying your life so that you can retire well one day? That is not an appealing concept to someone in their 20s. You’re at the prime age of enjoying new experiences, meeting new people and figuring out who you are and who you want to be. The age of 65 feels like an entire lifetime away. But it’s the tough decisions you make early on in your life that will help shape your financial future.
Here is some advice I would give to my younger self and which I use as a compass to guide me for my own future.
1. Understand the basics of money that you weren’t taught at school.
Unfortunately, our schools and society don’t teach us much about money and if you grew up anything like me, money is a forbidden subject in most households. Learn to earn, spend, budget, invest, and grow wealth. It only takes a bit of effort to master a few key ideas and practices. This little effort will massively reduce stress about money in your life.
2. Spend less than you make. It’s that simple.
There is no shame in living frugally, especially in the early part of your career. Learn how to set up a budget and stick to it. Aim for the maximum savings rate and think very carefully before taking on debt. Loans aren’t for spending. They are to be used to make an important purchase, investment in business, career or academic needs and so much more. If you’re borrowing money to eat and go shopping, you should stop and reconsider your choices.
3. Start investing, even if it’s just R250.
If you have some money to spare, put it to work by investing in yourself, your retirement fund, or another assets that generates passive income immediately. It doesn’t matter how little it is initially. Time is on your side, so don’t waste it. Let the magic of compounding exponentially grow your wealth. You’ll be amazed at how quickly it accumulates.
4. Watch your money grow (It’s possible)
Most importantly, enjoy the process of learning about budgeting, investments, different products, markets and growing your wealth. Enjoy the process of watching your money grow over time. One day you will look back, and wish you’d started even sooner.
Use the best financial advantage you have. Time.
As a young investor, your power lies not in timing the market, but in that you have time in the market. Combining your savings with time and allowing it to benefit from the power of compound interest is something you can’t make up for when you are older.
As boring and uninspiring as that may sound, there is something fabulous about it too. Regardless of how much you invest, if you just have the patience to let your investment compound and the discipline to continue saving through good, bad and boring times and not get distracted, you will be amazed by the power of compounding over time.
Risk Warnings This commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. The information, data, analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar Investment Management South Africa (Pty) Ltd makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this commentary. Except as otherwise required by law, Morningstar Investment Management South Africa (Pty) Ltd shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use.
This document may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.
Morningstar Investment Management South Africa Disclosure
The Morningstar Investment Management group comprises Morningstar Inc.’s registered entities worldwide, including South Africa. Morningstar Investment Management South Africa (Pty) Ltd is an authorised financial services provider (FSP 45679) regulated by the Financial Sector Conduct Authority and is the entity providing the advisory/discretionary management services.