Life-stage financial mistakes to avoid, for the sake of your security

South African households, with more limited incomes in the current highly inflationary environment, are nowadays caught between a deep desire to save the rock of saving for a comfortable retirement, and the hard place of leaving a legacy for their children.

Saving has long been punted as a necessary obligation for South Africans, for whom frugal households had a fall-back during the global credit crunch, while spendthrift households are now besieged by untold hardship.

“For any person, less external dependency means more freedom of choice, while improved financial health not only increases present-day security, but also enriches life and retirement planning,” says Schalk van der Merwe, Area Manager at Nedbank Financial Planning, Nedbank Wealth.

Van der Merwe, a certified financial planner, who has been tracking segmented consumer spending habits during a dedicated career spanning over 15 years, provides a broad breakdown of the spending habits of different South African age groups, with simple advice to change behavioural patterns.

Spending habits by age group

18- to 25-year olds: Irresponsible debt phase
Mistake: They generally take on too much debt - financing a new lifestyle, as opposed to earning it, predominantly using credit to access student loans.
Advice: Starting to save early on in life is the best choice to reap the full benefit of compound interest.

25- to 35-year olds: Good longer-term debt phase
Mistake: They don’t settle down early enough, and spend potential savings on big car loans.
Advice: Generally, incomes are at levels to take on "good long-term debt" like home loans. The difference between good and bad debt needs to be more clearly understood.

35- to 45-year olds: Serious savings phase
Mistake: They often cash in their pension and provident funds to start new business ventures and big home loans.
Advice: They need to apply more realistic thinking about the value of their current asset base and what it will be worth in the future.

45- to 65-year olds: Silly debt phase
Mistake: Here, especially the empty-nesters spend their "child free" money on new fancy cars or exotic holidays, without calculating what percentage of debt has been repaid.
Advice: That disposable cash should be able to work for their future goals.

65- to 85-year olds: Low debt phase
Mistake: They become too conservative in their investment choices and don’t keep track with inflation, wanting to just maintain their relatively comfortable lifestyle throughout retirement.
Advice: The time value of money and the importance to understand their personal cash flows vs. their life expectancy needs to be better understood.

Van der Merwe advises South Africans across all age groups to adopt some form of long-term savings plan. “Every person should, in fact, have a short, medium and long-term strategy in order to reach individual goals,” he says. “The key is to set goals. A good financial plan, clear objectives and discipline will determine how responsibly individuals manage their savings agenda.”