Young professional? Set up your personal finances for long-term success

As a young professional, you may have just started your first job and become financially independent from your family. This is quite a unique financial position..

So how should you arrange your personal finances for long-term success? We found out what young professionals need to focus on and keep in mind regarding their finances.

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The unique personal finances of young professionals

According to Reagan Mitchell, certified financial planner and managing director of WealthyMe, many young professionals, especially Gen Z and Millennials, are in a unique life phase with a unique set of financial circumstances.

“They are at the progressive phase of their careers, earning above-average incomes, able to access information at their fingertips, don’t have children, and likely still live with their parents,” says Mitchell.

“Given this, dynamic, young professionals are having the time of their lives, enjoying the fact that they have surplus income, and spending money on things that matter to them,” he explains.

He points out that their financial planning goals range from wanting to build a good credit score to saving to purchase that first vehicle, and even planning a group overseas trip.

“This is great. However, they need to guard against reckless spending which could lead to unnecessary debt accumulation, to gratify immediate needs,” says Mitchell.

“While you’re unmarried, don’t have dependents and possibly still living with parents, be sure to put a financial plan in place, because without it, you’re going to spend recklessly,” he advises.

Mitchell suggests starting with a budget to track your expenses and then doing monthly recons. He points out that this process can be automated by using personal finance apps, like 22Seven or even just an Excel spreadsheet.

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According to Ana Scott, executive financial planner at Momentum, young professionals find themselves in the fortunate position of earning on average a higher income than others in their age group, enabling them to have a higher disposable income. 

“No matter how clever we are, our emotional ability to manage money often rules our decisions on what we do with our money, instead of rational or logical decisions,” says Scott.

She believes it’s important to make wise, well-calculated money decisions, which is why she recommends having a qualified financial adviser.

“Our experience with young professionals is they often lack the ability to delay gratification. Thus, we highlight the need for a financial adviser to be present early on in their careers,” says Scott.

Consider these tips for financial success

Mitchell says that these are the financial goals young professionals should pay particular attention to, in order of priority, to make the most of what they’re earning:

1. Protect yourself

Before you do anything else, make sure that you’re protected. Usually, the last thing on the minds of young professionals, which is critically important, is to buy protection for unforeseen life events.

This may include being retrenched, losing your ability to earn income because of an illness or injury, dying sooner than expected (funeral or life insurance), or incurring major medical expenses. It also includes protection for items like vehicles and technology gadgets.

2. Build a good credit score

How do you do this? Pay all your bills on time, limit spending on credit facilities like credit cards or clothing accounts to a maximum of 70%, and don’t necessarily close your credit facility when it is paid up. This hacks the credit utilisation algorithm that credit bureaus apply to your credit score.

3. Create multiple streams of income

This can be done through a side hustle and stock trading or passively through investment returns. The income from this can go towards funding:

• Savings: This can be towards an emergency fund that will provide protection for unexpected financial emergencies or financial shocks. Examples would be paying an excess on a short-term insurance claim or perhaps covering the cost of medical expenses not covered by a medical aid. It can also be towards a specific goal like an international holiday or capital to start a business in the future, as opposed to accumulating debt to pay for it.
• Building wealth: Once the layers of protection have been prioritised, young professionals can focus on wealth creation. This may include investments for retirement, and purchasing a diversified portfolio of financial market instruments like shares and listed property that will provide passive income in the future as well as capital growth.

Besides this, Mitchell also recommends keeping the following in mind:

• The importance of investing in knowledge by furthering your studies that will ultimately increase earning potential in the long-run.
• It's wise to draft a will. This will deal with distribution of any assets accumulated in the event of passing away sooner than expected.
• Understanding the cost of debt and thoroughly comparing financial transactions like buying a vehicle or obtaining a credit card. For unavoidable debt in purchasing big-ticket items, try to save towards a substantial deposit to reduce interest in the long run or repayment period.

“Be ambitious in your goal-setting, but also remember to be realistic by making provision for disposable cash to spend on socialising. You’re young, after all. Prudence doesn’t have to come at the expense of enjoying the fruits of your labour from time to time,” says Mitchell.

Set up personal financial goals

Scott recommends understanding the power of compound interest – the earlier you start saving the better. She suggests shaping your future by having financial goals, and the very first step is to draw up a budget.

She outlines the following examples of financial goals:

• Feeling financially secure – protecting your wealth from disability: risk planning
• Paying off bad and good debt as soon as possible. Start with the little debts first and strike them through once completed. This brings about great satisfaction.
• Starting a business
• Saving for retirement
• Building an emergency fund for unforeseen events
• Buying a home
• Saving for a vacation or a new car

Scott says that young professionals should have a balanced portfolio, maximising products that meet their needs. It’s important to have a balance between short-, mid- and long-term investment solutions. 

“The long-term solutions should cater for retirement needs. Many different products or investment vehicles are available depending on risk appetite. Retirement products do also carry tax incentives, which makes the returns very positive,” says Scott.

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