Can you relate to not being in control of your finances? The reality is that feelings of helplessness and anxiety about finances resonate with many young adults. However, sound financial planning principles will enable you to manage these feelings and regain control.
Let’s take Fred for example. A young tech consultant who has worked for a software engineering company in Cape Town for the past 5 years. Fred comes from a home where discussing finances around the dinner table was taboo. Given Fred’s upbringing, becoming financially literate was not a priority. Consequently, Fred has neglected his finances – causing undue stress from making poor financial decisions. After speaking to a colleague about his situation, Fred sought out the services of a financial planner. A financial planner examined Fred’s situation and provided him with the following 5 tips to take control of his finances as a young adult:
1. Budgeting
Many young adults don’t know exactly what they spend their money on. The key to taking control of your finances starts with a budget. Having a budget is the best way to ensure that your expenses are paid and your savings are on track. The basic principle of a budget is simply to make sure that your expenses do not exceed your income. The following will help you get started:
- Gather your bank statements
- Review and note down all inflows and outflows for the last three months
- Make use of a budget template
- Leave room within your budget for unexpected expenses
Budgeting should allow you to curb your spending on those things that you can do without, which could go towards to saving and investing.
2. Education
For many, financial literacy is not a topic of discussion at home and neither was it a part of their schooling curriculum. This leaves many young adults feeling hopeless and at risk of making critical financial mistakes. This is where it can be beneficial to engage with a financial planner who will provide you with the knowledge you need. They can help you understand technical financial concepts, legislation and products within an ever-changing environment. Getting involved in your financial planning and being kept up to date with current affairs can provide you with a satisfying feeling of control.
3. Set financial goals to get control of your finances
This where you get to think about the financial goals that you would like to achieve during your lifetime. Identifying these financial goals will be easier if you divide them into short-, medium- and long-term goals.
Your short-term goals might be to:
- Establish a budget
- Create an emergency fund to cover 3–6 months of expenses
- Pay off debts, especially high-interest credit card debt
Your mid-term goals might include:
- Buying your first home
- Travelling
Your long-term goals may be:
- To save for a comfortable retirement
Together with a financial planner, you get to control the narrative and plan a path to achieving your financial goals.
4. Protect your biggest asset
As a young adult, your biggest assets would most likely be your health and your ability to earn an income. For this reason, it may be in your best interest to insure yourself against life-changing events i.e. disability or illness. Review all your insurance contracts together with your financial planner to make sure your insurance addresses a real need and that you are not over-insured.
5. Review your progress
Take the time to meet with your financial planner on an annual basis. This will allow you to reflect on the past year, track your progress, and plan ahead.
There are many parallels between managing the emotions that Fred and many young adults experience and sound financial behaviour. These tips should help you develop good money habits to take control of your finances.
Kgomotso Makena is an articled financial planner at Netto Invest.
