Millennials are more likely than older generations to save money towards travel, their education, a car or starting their own business, according to a recently released millennial survey by Old Mutual.
"This shift in priorities speaks to the bigger differences in the way millennials and older generations view money and the unique challenges they face," said Elize Botha, managing director of Old Mutual unit trusts.
The survey, however, also revealed that 35 percent of millennials were saving money to pay back debt, and this number was 13 percent for older South Africans.
It is this that Botha cautioned against, saying debt could severely hamper millennials' saving goals. It is only by reducing it, in tandem with investing in investment vehicles that offer growth assets and returns, can millennials hope to reach this goal.
She highlighted four pitfalls millennials may face on their journey to financial freedom:
1. High levels of debt
"A rule of thumb is never to spend more than you earn," said Botha. This can be achieved by applying the 50-30-20 rule of budgeting.
Botha explained: "Use 50 percent of your salary to cover your essential expenses. Allocate 20 percent of your salary towards your investments and personal goals – it's recommended to put away 15 percent of your salary towards your retirement savings. Lastly, use the remaining 30 percent of your income for flexible spending. However, if you're currently in debt, use this money to pay off your debt as soon as possible."
2. Saving, rather than investing
61 percent of millennials in the survey were saving money in a bank account, but some didn't display a full understanding of the difference between saving and investing.
"Unlike saving — which is setting money aside with the intention of spending tomorrow, the second step to reach financial freedom is rather to invest and build wealth by creating a second source of income to supplement your salary," explained Botha. "Bank accounts are seldom able to deliver real growth required to beat inflation, whereas equity-based investment vehicles can protect the buying power of your money over the long term."
3. Keeping up with the Joneses
The third pitfall is overspending — often utilising expensive credit, to buy the things you absolutely "need" to appear successful. "What people don't realise is that the real secret to financial freedom is to keep your living expenses as low as possible," said Botha, who also advised against constantly increasing one's credit limit as one's income increases.
4. Not defining your values
"Without a clear goal most people will find themselves spending rather than saving," said Botha.
Botha pointed out that our relationship with money is often complex, and this is why understanding values "is essential to find the resolve to achieve financial freedom. When we're working towards something that's important to us, we're often more willing to work harder to reach our goal."
"Investing enough money to be financially free may feel like a long shot, but the first step is always the hardest. Don't be intimidated by your goal; start small, and once you've achieved a milestone, you'll be more motivated to reach the next, and bigger goals won't seem so unattainable anymore — start today," she said.