Looking back at my 20's has been both fun and sad. I experienced so much in my 20's, things that made me happy beyond measure and things that depressed me beyond what I knew was possible. One thing that stands out about my 20's is the financial lessons that I learned. Some lessons were painful and others I have no words for. We all make financial mistakes. In this post I will share with you lessons to prevent debt, how to save and invest and how to bank. These lessons are from my 20's but can be applied by anyone at any age. This is part 1 of Money Lessons from my 20's
Lesson #1: Everything Changes so Save.
Financially speaking, the 20's are the baptism of fire for most of us. You will become rich and you will become poor all in the same decade. Why? Because nothing lasts forever yet in your 20's when you are straight out of university and have finally landed a nice job and are making a little bit of "serious" money for the first time, it feels like you are just going to be on your way up forever. Then BANG!.. you lose your job (dismissed/retrenched) or your contract is not renewed or the company you work for closes down. So many things can happen, so you must understand that the nice paycheck you have is not forever so save.
Few situations will cause you more pain than losing your source of income but still having to a pay vehicle installment on your new Renault Kwid or Hyandai Grand i10.
The worst part is when you have to accept that no matter what you do your car is going to be repossessed eventually. But before you heal from that, you will fall behind on rent and your landlord will eventually evict you. That first eviction will hurt you in ways you did not know exist. Worse if you live in a city far from home and now have to deal with the career set back of moving back home.
So how do you prevent all of that? Save and save as much as you can. There are two savings account that I believe everybody should have. There are plenty more, but these are the basic two. 1 Savings & Investment account and 2 Emergency Fund.
A Savings & Investment account is basically an account you open to use to save your money and earn some interest. Thus, the main focus of this account should be cash preservation but with a little bit of risk. This account should complement your other savings products such as an RA or Provident Fund. Simplest way to start with this account is to open an account with your bank or other institution. If you use your bank, make sure it's an account with a difficult withdrawal procedure, why? so you can prevent yourself from transferring money back to yourself and using it out of impulse. Impulsive spending from savings account is something that happens a lot to people because discipline collapses when it can easily be challenged. I would recommend you set up a debit order of between 5% to 10% of your salary for this, it might not seem like much, but you will watch compound interest work its magic for you.
If you really want to save even more, open a TAX FREE SAVINGS ACCOUNT and use it for your savings. You will benefit from not having to pay SARS on any gains in this account. I recommend the Easy Equities Tax Free Savings Account, it has been voted the best in the country and since it is not linked to your bank you won't impulsively take money out of it to spend. Since you will set up this account in a way that prevents you from quickly getting this money, what will you do in case of an emergency?
Emergency Fund
The emergency fund is meant to act like an insurance for unexpected situations. It is important you have rules for your emergency fund, so you do not dip into it for just anything.
How much should you save for emergencies? Here are rules you could follow to determine how much you should save...
Rule Number One: Cover your salary
Ask yourself if you were to lose your main source of income, how quickly can you replace it?
That answer will tell you how much you should save. If the answer is 6 months than aim to save 6 months' worth of your salary. It sounds crazy I know but if you start early before the day you find yourself out of work, you could be surprised by how much money you could save.
Rule Number Two: Define emergencies
Define what situations are emergencies in your life and set an expected cost for them. I am sorry to say but your best friend needing money to make it to the end of the month is not an emergency or your mother needing to renovate her kitchen because your cousins are coming over during the holidays, that is not an emergency. You getting sick or crashing your car and similar situations are emergencies. An emergency is an unexpected expense that threatens your way of life or progress. Anything else can be saved up for. So, figure your risks that you have not insured and save up for them.
Rule Number Three: Insurance Excess
If the ideas above do not tickle your fancy, then simply get various insurance covers.
The first insurance you could get is Salary Protection Insurance which pays you per month if you lose your job. Liberty has some pretty good plans as well as other major financial institutions. I am always confused when people tell me they do not have a plan for what to do if they lose their job. It is strange because at some point everybody loses their job.
The second insurance I recommend getting is Credit Protection Insurance, this type of insurance pays your debts up to a certain amount if you lose your job, get disabled or pass away. I recommend Yalu for Credit Protection Insurance. Their insurance covers Personal Loans, Student Loans, Revolving Loans and Credit Cards. Take note that if you use insurance products as back up for emergencies then your emergency fund should consist of money to cover your excess payments. Simply calculate the worst-case scenario (your car is written off and you lose your job on the same day plus get sick) and how much excess you would need and aim to save double that amount. The other half will cover emergencies you cannot insure against.
Your emergency fund money must be easily accessible to you but not so easy that you get tempted to spend it. Open an account that enables you to access your funds in 24 hours or less but just not immediately. And don't think your credit card is your friend for emergencies. Speaking of credit cards...
Lesson #2: Avoid credit cards in your early 20's
After you get that nice job, your bank will offer you a credit card. This is a key moment in your life because you can potentially make a decision that hurts you for years to come. Understand that a credit card is an instant loan in your pocket. Take that loan and fail to pay it back even once and you will accidentally start a vicious debt cycle in your life.
I fell prey to the credit card. My bank gave me a very lovely black card at 24, they started me on a gold card then quickly escalated me to black. My ego pretty much screwed me here, having a black card felt nice and the airport lounge benefit was great. However, none of the perks of a credit card outweigh the benefits of having a peace of mind. It took me two years to get rid of the credit card debt. The credit card had been closed and lawyers were now involved. Best way to prevent it from getting that far is to not take the credit card in the first place. A lot of people will tell you getting a credit card is a good way to build up your credit score (myself included). Do not believe them and here is why...
As an early 20-something year old you do not know who you truly are with money. You might have a finance degree, a psychology degree, heck you might even be a financial adviser or portfolio manager. It does not matter. You do not know what behaviors a little extra money will inspire in you. People get caught up in debt because they did not know who they are with money. It is very easy to rationalize using the credit card until it is maxed out. Avoid this, it will not help you. If you want to build up your credit score, rather get a loan and take the money and invest it in an ETF. That way you pay back the loan in installments to improve your credit worthiness but also don't use the money for consumption.
Credit cards tend to get used for consumption that is unnecessary. Lenders can see this and that will ruin your credit record. Distressed borrowers are easy to see by their continuous use of credit and using your credit card a lot will signal you are distressed and struggling to pay back the credit. How can this be? Because every time you pay it back you use it the following day, that signals that the money you are paying it back with is not money you can actually afford to pay a lender with. So do yourself a favour and do not get a credit card.
But what if I really want one?
If you must still have a credit card, make sure the max limit is 10% of your salary. Yes, very boring but remember most of the perks are about the colour of the card, not its limit. People will make you believe the limit determines the colour of the card and the perks, which is not entirely true. Banks will give you a black card with a R3000 limit as long as your cheque account is black as well. But truth be told there are not really any perks in local credit cards anymore. Slow Lounge? Visit the Bidvest Premier Lounge, they accept cash and walk-ins.
Travel insurance? There is plenty of high quality travel insurance online. You see there really isn't a reason to have a credit card anymore unless you want to complicate your banking... and that leads me to lesson number 3...
Lesson #3: Simplify your banking
If you have more than one bank card in your bag then you are a bank product junky.
What is a bank product junky? It is someone who impulsively applies for every banking product that is advertised to them. Latest card, they have it, latest bank sim card, they have it, latest short-term loan product, they have it, latest zero fee account, they have it, latest business account, they have it.. you get my point. This type of person most likely has more than one personal bank card and from different banks too. They open new accounts and procrastinate to close the old ones until the fees rack up. Then they never want to pay the negative balance so leave the accounts open. This person is the banks cash cow because of all the fees they pay for these cards and accounts. Do not be this person. Being this person is messy and makes managing your finances difficult.
It is a lot easier to see how good or bad you are with money when it goes in and out from one account
In your 20's you might find yourself getting offered all sort of banking products. You will be offered "better service", "more rewards", a private banker, a personalized experience etc. Do not fall for this. The bank's goal is to have you deposit money with them and then pay exuberant fees for it or just pay exuberant fees for having a product without using it at all. Here are the accounts you need to function financially:
Cheque Account. This account should be the only one with a bank card. This is where all your income comes into. From this account you distribute money to every other account and pay for services. Every other account besides this one should be about making you money.
Savings Account (Emergency Fund). We have spoken about this account already. You put money into this account for emergencies and paying excess on your insurance products. This account is about cash preservation first and profit second.
Tax Free Savings Account. This account is about one thing, "paying yourself first". The reason this account is great is because you can invest tax free by using it. I recommend having high dividend yield assets in it that you will hold for the long-term and earn dividends tax free. After you have maxed your annual TFSA allowance then you should have an investment account. (TFSA is maxed out at R36 000 per year in South Africa)
Investment/Brokerage Account. This account is all about investing and making yourself money. If you read the article, What Tools Do You Need to Invest you will get an idea of where and how to get a cost-effective account for the purpose of investing. In this account you should be able to buy shares, bonds, ETF's, ETN's etc. in order to build your asset base.
Retirement Annuity/Retirement Savings. This account is about protecting your future self. Everybody eventually ages and so it's important to have assets for when you cannot work and generate an income anymore. Start small and add to this account every month.
Now I cannot tell you which services to use because everybody's needs are different. I can only recommend how to structure the products you use. These are the services I am currently using:
1. Cheque Account, for my cheque account I currently use Discovery Bank. I used to have a lot of FNB Accounts that cost too much and caused me problems. I am never surprised by nasty fees making my money vanish or leaving me with a negative balance. For most of us our banking needs are not complicated. We just need a place to receive, send from and store our money. If you are earning less than R1 million per month or don't plan to have a balance of R1.1 million constantly in your account, then using one of the usual bank account services is pointless and a useless waste of money. Any standard account will enable you to receive, make payments and store your money.
But Omega, I plan to apply for a bond/home loan, so I need this account, so this bank approves me
Whoever started the myth that a bank will reject your home loan application if you do not bank with them or approve it if you do is a marketing genius. This belief is simply not true. Nobody who has the income, is credit worthy and meets the affordability criteria would be rejected simply because they do not bank with XYZ bank. Furthermore, most of the time the best way to apply for a home loan is to go through a service like BetterBond where one application is used across various institutions and the one with the best offer wins having you sign a bond with them. Seeing services like this should immediately tell you that where you bank is not an issue to other banks.
2. Savings account (emergency fund). My savings account is with Discovery Bank as well.
I now have the discipline to prevent myself from dipping into my savings so I can have this account with my bank but for most people I recommend having it somewhere else.
3. Tax Free Savings Account. My tax free savings account is with Easy Equities and I am able to buy fixed income ETF's and other key index tracking ETF's. The savings here are for the long-term.
4. Investing/Brokerage Account. I have one with Easy Equities. This is where i make all my investments into local assets. For international investments I use Interactive Brokers.
5. Retirement Account. I have an RA (Retirement Annuity) with... take a guess... Easy Equities. The great thing about the Easy Equities RA is that I can contribute whenever I can or want to, so I am not forced to contribute a fixed amount every month. If cash flow management is important to your financial success, then the Easy Equities RA is the best option for you.
So there you have it. Part 1 of Money Lessons from my 20's. You will notice that all the lessons listed above are about getting you to achieve three things. 1 saving and investing, 2 avoiding debt and unnecessary costs and 3 managing and limiting risk. All these things will establish a firm foundation for other financial activities. It is better to prevent failure than to try being successful after failing. Remember Everything Changes So Save, Avoid Credit Cards and Simplify your banking. Until next time.
happy investing.
- Omega
Remember: Opinions expressed in this article do not and never will constitute financial advice. Every person's financial situation is different, I recommend you speak to a financial adviser about yours.
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