In the Beginning:
So, you have secured your first job and life is your oyster. You’re earning your own money and are now independent. You need a home, a car, furniture, appliances, cell phone, work clothes, party clothes, a sound-system …. Any number of “necessities” to make your life complete. You are experiencing this crazy, beautiful dance, called “life”.
And it’s so easy! Bank loans, furniture account, clothing account. Easy payment plans. It’s only another couple of hundred rand per month. EACH!
You only earn the money once a month, but it’s oh so easy to spend it three or four times in your head, and lose track of everything.
Then, an unexpected emergency hits you, and you are unprepared for it. There is no money available to deal with it and suddenly the joyride has become a scary rollercoaster, in a house of horrors! And you are in danger of sliding into a pit that nobody warned you about.
Many people in this country are from relatively poor backgrounds and have never had the luxury of having their own money to “practice on” as children. So, they have not been taught how to manage their own finances.
For most young people, their first bank account is opened when they receive their first paycheque, so they have no experience in banking.
Unfortunately, “personal finance” has not yet become a required subject in high schools, so most young people are fairly clueless when they go out into the real world for the first time.
The following tips are aimed at helping you understand some of the most important things you need to understand about money, if you want to live a comfortable and prosperous life.
1) LEARN THE ART OF SELF-CONTROL
If you were lucky, your parents or other role models taught you this when you were a child. (E.g. wait until after dinner before you have a sweet, wait until Christmas day, before you open a gift or save up your money to buy that new bicycle.)
The sooner you learn the art of delaying gratification, the easier it will be to keep control of your finances. In simpler terms, sometimes you have to wait for something before you can get it. Yes, it is easy to buy anything on credit, when you want it, but it really is better to save up the money first and then buy it. Or do you really want to pay interest on a pair of sneakers, or a bag of sugar?
If you have a credit card, and do not pay your bill in full at the end of each month, you could effectively be paying off these items for years, with interest!
Credit cards are convenient and most banks offer rewards on them, but make sure you pay the full balance on them each month and don’t be tempted to have multiple credit cards that you cannot pay in full each month.
2) DRAW UP A BUDGET AND KNOW WHAT YOU ARE SPENDING YOUR MONEY ON
Yes, this sounds boring and restrictive, but budgeting is the most important step in identifying where you can spend less and where you can save. The best time to review your budget is the month that your increase takes effect, then you can plan ahead for the next year. But make sure that you account for fixed expense increases, which may be effective in a different month.
The first step is to ensure that your expenses do not exceed your income. Remember that making small manageable changes and cuts in your everyday expenses can have as big of an impact on your finances as getting an increase. For instance, if you habitually drink two cups of coffee every morning, before leaving for work, and you cut that down to one, this could add up over the course of a month and end up making a significant difference. There is a very old, but true saying: “Look after the cents, and the rand’s will take care of themselves.”
Keeping your recurring monthly expenses down will also save you big bucks in the long run. Living in a small affordable flat, instead of splashing out on a fancy apartment, will allow you to save money to buy your own home, before you know it.
3) TAKE CHARGE OF YOUR OWN FUTURE
Understanding how money works should be your first step toward making your money work for you and thereby, controlling your own future.
If you don’t learn to manage your own money, other people will find ways to misuse it for you. Some may have good intentions, but not know what they are doing and unintentionally misguide you. Others may deliberately try to take advantage for their own ends.
Instead of relying on others for advice, read a few basic books on personal finance. Arm yourself with knowledge that will help you ensure that no-one can catch you off guard, not even a partner who slowly siphons your bank account, or friends who want you to go out with them every weekend, so they can help you blow tons of your money.
4) SAVE FOR YOUR RETIREMENT NOW
Years ago, your parents sent you off to pre-school with the intention of preparing you for success in the future. In the same way, you must now plan for your retirement, well in advance.
Because of the way compound interest works, the sooner you start saving, the less you will have to invest, to build-up the amount you will need to retire on, and the sooner you will be able to call working an “option” as opposed to a “necessity”. To clarify, compound interest means that you don’t only earn interest on the amount you put in, but as each month’s interest is added on, you earn interest on the previous months’ interest as well.
Company-sponsored retirement plans are usually a good choice, because companies often match part of your contribution, which is like getting free money.
5) UNDERSTANDING INCOME TAX
It is a good idea to know about and understand Income Tax, before you agree to a starting salary. When you are offered employment, you need to know how to work out if you will actually earn enough money, after tax, to cover your financial expenses and help you achieve your goals.
Luckily, these days there are online calculators, which assist you in calculating this. These calculators will allow you to punch in your gross salary amount, and will show you how much will be deducted for income tax and how much you will be left with. This is known as you net, or take-home pay. Ensure that you select a calculator for the current financial year.
It is also a good idea to check this if you are considering changing jobs for a better salary. Your salary may well increase, but so will your income tax.
6) THE EMERGENCY FUND
No matter how small your salary may seem, it is wise to find some amount, in your budget, to save in an emergency fund every month. It does not have to be a large amount, as long as you are dedicated in saving it every month.
This money may really keep you out of financial trouble one day, and will help you sleep better at night. Also, getting into the habit of saving money, and learning to discipline yourself into treating it as a non-negotiable, monthly expense, will mean that you get used to not having it to spend. Sooner than you realise, you will have more than just emergency money tucked away for a rainy day: you’ll have retirement money, vacation money, and one day, even money for a down-payment on your own home.
Don’t just hide this money under your mattress. Firstly, it will be easier to get to, for “imagined emergencies”, and secondly, over time, inflation will devalue your saved money. Think about it, you may be able to buy something for R50 this year, but next year, that same item could cost R55 rand or more. But the R50 under your mattress will still only be R50 next year.
Rather put it into a high-interest savings account, where it will earn more money for you. Relook at the type of account you have this money in, at least once a year, as most banks offer accounts at a higher interest earning rate, if the amount you have saved is more than a certain amount.
7) LOOK AFTER YOUR HEALTH
This may seem like strange advice when talking about finances, but it is still important. If a medical aid fund seems an impossible cost to you now, what will you do if you have a medical emergency, like a broken bone, which can cost thousands of rand’s to treat. It’s easier than you think to wind-up in a car accident, or simply fall down the stairs. And an untreated illness may well cost you your job. You can save money by getting quotes from different medical aid providers, but don’t delay this important task.
It is also good planning to keep yourself healthy while you are young. Eat fruits and vegetables, maintain a healthy weight, get regular exercise, don’t smoke or take drugs and don’t drink alcohol in excess. You will thank yourself in the future, when you are not having to pay massive medical bills because of a misspent youth.
Remember, you can become an expert at managing your finances, even if you don’t start off with a fancy degree, or a privileged background. If you use this financial advice to improve and plan your life, you can be as prosperous as you dream of.