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A guide to building wealth in your twenties

It is never too soon to begin building your wealth and planning for your financial security. File Image: IOL

It is never too soon to begin building your wealth and planning for your financial security. File Image: IOL

Published Jul 25, 2022

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By Kerry King

The key to building your wealth is to start as early as possible, but often this is easier said than done for the younger generation. Citadel, the specialist wealth management company, asked a sample of young professionals between the ages of 21 and 24 to anonymously submit their most pressing financial questions on how to start building their wealth in their twenties.

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HOW DO I HANDLE TAX IN SOUTH AFRICA AND FOREIGN EARNINGS SHOULD I TAKE A GAP YEAR?

With so many South African graduates working as digital nomads or in other careers abroad, it is important to note that the South African tax system states that if you are a South African resident (for tax purposes), you will be subject to tax on all local and foreign income you receive, regardless of where it is paid and where the source of the income is. This is called the Worldwide basis of taxation.

If you exceed the tax threshold and if you have a South African passport and regard South Africa as your regular place of residence, it is likely that that you will have to pay tax in South Africa.

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Fortunately, there are a few foreign tax exemptions that you may qualify for in terms of the South African Income Tax Act together with the application of the relevant Double Tax Agreement in place with South Africa and the respective country abroad. This may potentially reduce your tax liability in South Africa or abroad.

To assist you with this, we would recommend that you speak to a tax specialist in this regard.

WHAT SHOULD I DO WITH MY FIRST PAYCHEQUE?

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Your first paycheque is your first step to achieving financial independence – a space we all strive to achieve in our life and into retirement. From your first paycheque, you need to take a long-term view on investing for the future by setting yourself long-term goals. Start as early as possible to invest in funds that enable you to make the most of the powerful force called compound interest – the exponential growth-upon-growth of your money.

Two rules to live by:

  • Save before you spend.
  • Never use debt to fund expenses.

It is good discipline to learn to budget and live within your means from your first paycheque. Be careful not to take on any unnecessary debt. That said, credit can be constructive if you use it to purchase assets (assets are investments that appreciate over time).

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The best gift you can give your children one day is for you to be financially independent in your retirement.

IS PROPERTY THE BEST FIRST ASSET TO INVEST IN?

Many people want to know whether investing in property is still a good investment, since this is what they grew up hearing from previous generations. Investing in property can be an emotional endeavour and is not without risk. Whether or not you should own your primary residence depends on your circumstances and affordability. Property can be a good investment if it is in an area where property prices are increasing. Just remember that property should not be considered a passive investment. Areas change, properties need to be maintained, and you need to be aware of what is happening in the property market and economy so you can actively manage your properties.

SHOULD I PRIORITISE INVESTING OVER SPENDING MY MONEY ON QUALITY OF LIFE?

There is nothing wrong with having a comfortable life. Just don’t lose sight of the big picture. It’s always advisable to develop a long-term investment mindset that is not waylaid by immediate and often temporary gratification, such as entertainment or conspicuous consumption. Building up an asset base is far more valuable than focusing on appearances and status. The more your assets grow, the more you benefit from compound interest – and that is how real wealth is built. Real wealth can afford you a better quality of life.

When starting out, your focus should be on paying off debt, but as your portfolio grows your focus naturally will shift to structures and asset allocation. Sound advice from a financial specialist is invaluable for these kinds of decisions and you’re never too young to speak to an advisor.

THE JOB MARKET IS TOUGH. IS BECOMING AN ENTREPRENEUR MY BEST BET FOR BUILDING WEALTH?

Entrepreneurship is actively encouraged in South Africa, but it is not for everyone. The risks of starting a business are high, the rewards for success could be equally as great, but being an entrepreneur does not come with a guarantee. Before you start a business, consider the long-term viability of your idea, the demand, market fit, competition, how to structure the investment opportunity, etc, before you dive in. If all entrepreneurs were able to assess all the risks accurately, no businesses would fail. There is no certainty in life – it's full of surprises – so be sure that you have the right appetite for risk before you embrace life as an entrepreneur.

DO YOU REALLY NEED INSURANCE PRODUCTS, PENSION, AND BUFFER FUNDS IN YOUR TWENTIES?

Life is full of uncertainties and the smartest way to live independently is to build security nets into your financial life giving you peace of mind. It’s always a good idea to start allocating some savings towards an emergency fund to assist when unforeseen financial shocks happen, as well as to start your retirement planning journey early. Although it may be regarded a grudge purchase, it’s also important to have the right risk cover in place based on your specific insurance needs. There is no greater relief than when you experience the benefits of having planned well for the unforeseen circumstances. However, make sure you don’t over insure as you’ll pay high premiums for something you may not need.

SHOULD I TALK TO MY PARENTS ABOUT THEIR RETIREMENT AND FINANCIAL SECURITY?

The biggest and best inheritance anyone can leave for their kids is their own financial independence. Talk to your parents about their retirement and financial security in their old age.

HOW DO I ASK MY PARENTS ABOUT INHERITANCE WITHOUT BEING INSENSITIVE?

No one likes discussing death, but equally nobody wants family breakups over clauses in your parents’ will. I believe it is important to have discussions about family succession as well as family structures. Family trusts or other financial vehicles can be an efficient way to protect the family’s intergenerational wealth. Trusts have trustees, a trust deed and beneficiaries. If you are or become a beneficiary of a trust, educate yourself as it will be important to understand all the aspects surrounding your family’s structure.

Kerry King is an Advisory Partner at Citadel

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