If you can start to manage your money responsibly as a student or new job entrant, you will be able to start to build long-term wealth. The key to wealth is not how much you earn, but how much you spend.
Most students or newly employed people will find themselves in a similar situation. You are finally earning your own money and so you want to start spending it – but in a responsible way.
The most important thing to remember is that as soon as you start to earn money, you should develop a healthy attitude towards money that will benefit you in later years.
Managing your money
Budget
Write down all your monthly expenses and any commitments you may have (like a student loan), so you understand what expenses you need to meet.
Save
Save 20% of your income and learn to live without this money. In Brenda’s case she should start saving R3 000 a month before she can calculate whether or not she can afford a car or furniture.
After five years, if she earned an average of 10% return per annum, those savings will be worth around R230 000. That would be a significant deposit to put down for a home.
Brenda must also remember that when she starts a full-time position, earning a higher salary, she needs to adjust her monthly savings to stay at that 20% level. She would most likely join her employer’s retirement fund which would help boost those long-term savings.
Prepare
If you are still living at home, calculate how much rent would cost you and save that in addition to your 20% saving. In this way you are learning to live on a budget that you can sustain when you leave home, and you can use these savings to buy furniture and pay a deposit when you do move into your own place.
If, like Brenda, you are already paying rent, calculate how much you need for your spending goal like furniture or a new car, and start putting money aside. Many bank websites have calculators to help you calculate how much you need to save.
Never buy furniture on credit – it will cost you double the amount. Rather eat off a cardboard box for a few months and save upfront to buy furniture with cash.
If you plan on borrowing money for a car, work out the repayments and insurance costs and start saving that amount each month towards a deposit. You will also get used to living on a budget that includes car repayments and insurance. This way you will know if you can really afford it.
Analyse
Keep a careful eye on what you spend each month. Remember that your wealth will be determined by how much you fritter away on seemingly small but essentially unnecessary items.
The biggest challenge for young people is temptation. Peer pressure may cause you to buy something you don’t need simply to fit in – or stand out.
Your aim should be to know exactly how much money you have in your pocket and watch where it goes. Be aware of each cold drink, airtime top-up, or pack of chewing gum. Everything adds up.
Start with a mindful approach to spending and it will be harder for you to justify bigger purchases to yourself, because you are aware of how easy it is to spend your hard-earned money.
Starting the savings journey
It is important to start with an emergency fund. As you will soon discover, no matter how well you plan, life is full of unexpected expenses. You can prepare for these by having an emergency fund.
Brenda should aim to start with R15 000 in an emergency fund. This could be kept in a savings account linked to her bank account. The funds need to be available within 24 hours, so a 24-hour notice account would be a good option.
Every young person just starting out in life should take advantage of the long-term benefits of a tax-free savings account (TFSA). You can save up to R3 000 a month in a TFSA and not pay any tax.
However, you can start with as little as R200 a month and invest in a wide range of TFSA options with investment companies like Satrix, 10X or an asset-management company like Ninety One or Allan Gray. You do not have to be “rich” to start investing.
If Brenda has a goal such as buying a house or car, she can invest in a high-interest money market account. It is a good idea to speak to your bank about their best interest-rate investment products. Some banks like African Bank and Tyme Bank are also offering excellent interest rates for those saving towards a goal, and Brenda could also look into the government’s RSA Retail Savings Bond options.
Think very carefully before taking on debt
Many youngsters get into significant debt after just two or three years of working because they are overspending on items just to look good and project a wealthy image.
By the time they reach 30 they are so overindebted they even need to consider debt counselling. They have also wasted the opportunity to start accumulating wealth and benefit from the power of compounding. This is usually because they have not been educated about the dangers of debt and the consequences of lavish spending.
Remember that there is good debt and bad debt. Good debt is, for example, a student loan, money for a small business, or a home loan. You will benefit from taking on these debts in the long term.
Bad debt is when you overspend on flashy clothing and shoes, parties, eating out, expensive gifts, and other non-essentials.
Do you really need three clothing accounts? Do you really need the very latest cellphone? What will stand you in much better stead is a strong balance sheet and a clean credit record so you can start to build real wealth – the kind of wealth that means you never have to worry about money.
You might not always have a job
Just because you have a good job today doesn’t mean you’ll still have it in a month’s time. South Africa is still going through tough economic times, and we continue to see many retrenchments.
Companies tend to follow a “first in, first out” approach, which means younger people are more likely to be retrenched. If you lose your job and you have opened clothing accounts, or you’re paying off a cellphone, computer or car, you may be in trouble.
Remember: taking on any debt is a serious commitment. But if you do get retrenched, find out if you have credit insurance on your debt. This will pay your installments for up to 12 months.
Beware the “affordability” debt trap
A salary slip opens doors, and financial institutions could be prepared to offer you three times your monthly salary in credit. This may be very tempting if you want to splash out on a new wardrobe or buy the latest iPhone.
But remember that what a financial institution considers “affordable” is not what you can really afford if you are to meet all your other financial obligations – including saving for your future.
Rather than taking a loan for R10 000 and repaying R1 200 over 12 months, save that R1 200 each month, and after just eight months you’ll have that R10 000 to pay with cash. Time really is money.