How South Africans in their 20s and 30s are saving and spending their money

South Africans born between 1982 and 2000 – commonly known as ‘millennials’ – are more likely to seek financial independence and personal fulfilment compared to their parents.

This is according to the latest Old Mutual Millennial report, which was commissioned to better understand the financial behaviour of employed millennials compared to older generations.

The report found that 24% of millennials are currently invested in a unit trust – versus only 2% among older generations – with 57% saying they invested in a unit trust with the purpose of increasing their net worth (1st) and 47% saying they looked to invest to reach financial freedom (2nd).

The survey also found that 35% were saving money to pay back debt – while this number was 13% for older South Africans.

Personal finance coach, Mapalo Makhu, said that the data points to the fact that millennials are facing unique financial challenges that makes them susceptible to debt.

“Many first-generation middle-class South Africans, millennials are playing ‘asset catch up’ – purchasing appliances and motors vehicles on credit – while caring for financially dependent relatives (other than their children) which creates a tension between the expectations of family and dreams millennials have for their own financial future,” she said.

The research also showed that millennials are more likely to save money – in order of priority – towards travel (37% versus 10%), their education (31% versus 4%), a motor car (32% versus 11%) or starting their own business (23% versus 3%) – compared to older generations.

“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, MD of Old Mutual Unit Trusts.

“Complete financial freedom – and the flexibility it offers us to travel, or to be our own boss – comes when the income from your assets exceeds your expenses. Only by reducing debt in tandem with investing in investment vehicles which offer growth assets and returns can millennials hope to reach this goal,” she said.

Botha outlined some of the other major findings of the report, and what they mean for Millennial’s finances.


Debt

Debt, typically in the form of personal loans, are often used to buy things that will be consumed – like appliances, clothes, or items that tend to depreciate over time.

The survey revealed that 64% of millennials – compared to 14% among older generations – had a personal loan and 35% (versus 13%) of their income was spent on servicing the interest on debt.

“A rule of thumb is never to spend more than you earn,” said Botha. The first step in achieving financial freedom is to eliminate debt by applying the basic 50-30-20 rule of budgeting, she added.

“Use 50% of your salary to cover your essential expenses. Allocate 20% of your salary towards your investments and personal goals – it’s recommended to put away 15% of your salary towards your retirement savings. Lastly, use the remaining 30% 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.”


Saving rather than investing

According to the report, 47% of millennials did not know what a unit trust was.

Others, who said that they could further define the collective scheme investment vehicle, tended to have difficulty in articulating their understanding of it.

However, almost 61% of millennials in the survey were saving money in a bank account.

“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,” said 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.”


Credit and not defining values

The third notable point from the research was that millennials used expensive credit to buy the things they absolutely ‘need’ to appear successful, said Botha.

“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.

“Constantly increasing your credit limit as your income increases to keep up with the expectations of friends and family only serves to keep you further away from reaching your goal.”

She added that many millenials don’t have a clear goal – meaning they end up spending rather than saving.

“Every person is unique, and our relationship with money is often complex,” she said.

“An understanding of your intrinsic values is also 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.”


Read: South Africans are starting to save for retirement five years too late

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