• Mduduzi Luthuli - Director / Investment Management

Welcome To The Real World! It Sucks; You're Going To Love It!

You’re now an adult and need to start contributing to society and become a self-sustaining responsible citizen. Stop bothering your parents and start paying your own rent, buy your own food and managing your expenses. Soon there’ll be a new character in your life, Mr. Debit Order. You’re going to love him or hate him. Your relationship with Mr. Debit Order will be largely influenced by your financial management skills. The need for financial management literacy has become a burning issue among young adults today. Owing to their desired lavish lifestyle and the ever-increasing cost of living, concepts like financial management and investing have gained a stronger foothold in the economy.

Financial management is a necessary life hack that is not taught at schools and universities unfortunately. Most young adults are confused as to what to do with their earnings due to lack of proper financial planning. Learning to manage your wealth and guarding it smartly, to be always prepared in case of any untoward situation is a critical life skill. The best way to battle the uncertainty of the future is by safeguarding everything we have today. It isn’t how much you make that’s important, it’s how much you keep.

While you might not feel like early adulthood is a time to worry about financial planning, there are plenty of building blocks that can be put into place early on. It can be hard to think about future planning when it comes to finances, but there are simple habits and tips that can help shape your spending and financial goals for years to come. Here are six tips that all young adults should keep in mind as they navigate their financial future.

1. You need a plan

Critical for long-term success, your financial action outline doesn’t need to be complicated but rather provide a starting point and create a baseline for measuring your goals. If, like many in your generation, you prefer portable, connected and personal technology, incorporate programs and apps into your initial planning. There is a growing number of finance sites designed to help you document your money goals, time horizons and investment objectives and, most importantly, create a strategy and action plan. If you’re unsure where to start, consult a financial professional.

2. Get a Grip on Taxes

It’s important to understand how income taxes work even before you get your first salary. When a company offers you a starting salary, you need to know how to calculate whether that salary will give you enough money after taxes to meet your financial goals and obligations. Fortunately, there are plenty of online calculators that have taken the dirty work out of determining your own payroll taxes. These calculators will show you your gross pay, how much goes to taxes and how much you’ll be left with, which is also known as net, or take-home pay. You’ll be better off in the long run if you learn to prepare your annual tax return yourself, as there is plenty of bad tax advice and misinformation floating around out there.

3. Start Investing

With time on your side, invest early on to maximize your returns. Starting an emergency fund is one of the smartest decisions you can take. Keep investments simple and costs low initially. For instance, consider low-cost, broad-based index funds in your portfolio to diversify holdings, reduce management expenses and mitigate tax consequences. Automating the transfer of money from your salary to your investment account streamlines this process. You can start with a small amount of your salary, 5% – 10%, until you get more comfortable and increase amounts later. An emergency fund is a portion of your budget that is kept aside as savings and used only for extreme emergencies. The fund is different from your regular savings, i.e. you should not use the money unless it is necessary.

Thanks to the miracle of compound interest, even a small sum of money saved regularly at a young age can quietly grow to a surprisingly large sum over the years. The sooner you begin saving, the easier it will be to reach your financial goals, which may include buying a home, owning a business or retiring, instead of having to save a high percentage of your income at an older age. When it comes to big investments such as purchasing a home, be sure to meet with a financial advisor to see where you are at financially. You may decide that you should wait a few years until you are more financially stable for large investments such as real estate.

4. Start saving for retirement now

Just as you headed off to kindergarten with your parents’ hope to prepare you for success in a world that seemed eons away, you need to prepare for your retirement well in advance. Because of the way compound interest works, the sooner you start saving, the less principal you’ll have to invest to end up with the amount you need to retire and the sooner you’ll be able to call working an “option” rather than a “necessity.”

It’s never too early to create a retirement plan. Retirement annuities provide tax-deferred growth, a powerful feature to help boost long-term returns and provide income decades from now when you stop working, because you get to put in pre-tax Rands and the contribution limits tend to be high. If your company offers a pension fund, ensure your employer matches a portion of your contributions (this is like getting free money). At the very least, contributions from either you or your employer should not be lower than 5% of your annual salary each.

What you have is time so use it to ensure you stand an even a greater chance to maximize your potential wealth for your far-off golden years.

5. Guard the cents

The most obvious solution to effective financial management is keeping a track of your expenses to know exactly where all your money is going. So, download an ‘app’ to your phone and start tracking all money that comes in and out of your bank account or you can request electronic notifications when your balance drops to a certain level. Another way to save money is to avoid fee-based overdraft programs and instead ask your bank to cover any shortages by linking your checking account to a savings account. The key is to make some hard decisions about ‘needs’ versus ‘wants’ because every Rand we spend on something we don’t really need is a Rand wasted. Creating a financial plan includes scouring all your incoming revenues and outgoing expenses, the actual (on paper or on screen) salary slips and statements.

This means preparing a budget and divide the earnings into expenses, savings/investing and surplus (if you are lucky). You may notice several fees tacked onto bills, loans and other expenses that you previously overlooked. Banks, for instance, often quietly change rules and start charging you increasing amounts for services you once received for free. Every fee means less money in your pocket. Try reducing the recurring expenses and stick to just the bare minimum. See how many fees you can reduce or remove in the year and reinvest those Rands in a tax-free savings account or retirement annuity. Either type of account can be your best financial friend if you have time on your side.

6. Build a good credit record

As you pay your own bills and debts, you are building a credit record. Credit reporting companies collect information on your history of paying debts, which is used to prepare credit reports and credit scores that reflect your creditworthiness. In general, the better your credit history and credit score, the better your chances of borrowing money at lower interest rates. Your credit history may also be considered when you apply for a job, an insurance policy or a car. A good credit score will be particularly important when you decide to buy a home. One of the best ways to build and maintain a good credit record is to pay all bills and other debts on time. To do that, avoid charging more on your credit card than you can pay off in full by the due date each month. If you can’t afford to pay that much, at least be sure to pay the minimum due, consistently and on time, to avoid late fees and a bad mark on your credit record.


Personal finance is an extremely interesting subject. While it is something that we all deal with, most of us never take the time to properly learn and discuss ways to improve. It’s never too early or late to change that and I encourage you all to begin with the steps laid out in this article. Always keep learning about how to handle your money. Make it your life mission to constantly be finding financial education resources and tools. I hope that in doing so, you’ll soon find that learning about money is fascinating because of the power it gives you to achieve your dreams. Anyone can get this power just by creating an action plan, the sooner the better.

Put enough effort into this area of your life and you will eventually find something money can’t buy……. FREEDOM!

Article published courtesy of Luthuli Capital


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