Managing new income

2011-06-04 12:15

How you manage credit, and how much you save in your 20s will determine your long-term financial success.

Tshepo wrote to City Press for some advice on how to manage his money. He is studying and working, and earns about R4 500 a month.

He has money left over after rent and food, and would like to buy a ­student car and start buying some ­furniture.

Most students or newly employed people will find themselves in a similar situation. You are finally earning money and you want to start spending it, but in a responsible way.

The most important thing to ­remember is that once you start to earn money, you are now able to create a healthy attitude to that income that will benefit you in later years.

Managing your money

1. Budget: As Tshepo has done, write down your monthly expenses and any commitments – like a student loan – you may have so that you understand what expenses you need to meet.

2. Save
: Immediately save 20% of your income and learn to live ­without this money.

In Tshepo’s case, he must start ­saving R900 a month before he can calculate whether or not he can afford a car or furniture.

After five years, his savings will be worth about R70 000 – that would be a 15% deposit on a R450 000 home.

3. Prepare
: If you are still living at home, calculate how much rent it would cost you and save that in ­addition to your 20% savings.

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 Tshepo, 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.

The bank websites have calculators to help you calculate how much you need to save.

Never buy furniture on credit. It is very expensive. Rather eat cardboard for a few months and save upfront. If you plan on borrowing money for a ­vehicle, 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.

4. Analyse: Be careful of what you spend each month. Remember that your wealth will be determined by how much you flitter away on irrelevant items.

Eunice Sibiya, programme manager for FNB Smart Solutions, says that 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 just to 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 a 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.

Taking on debt
Sibiya says that their workshops are usually full of youngsters who got themselves into debt after just two to three years of working.

This is because they overspent on items just to look good and project a wealthy image.
Some of them are already in debt counselling at the age of 25.

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 bond. You will benefit from taking on these debts in the long term. Bad debt tends to accumulate when you overspend on flashy clothing, labels, shoes, parties, expensive gifts and other non-essentials.

Need vs want

Assuming that you are financially able to take on your first debt, such as a cellphone, clothing or even a car, you need to be really sure that you are ready.

Does “ready” mean gainfully employed or just ready to impress ­others with the latest BlackBerry?

Sibiya says before you do anything you should sit down and assess your needs versus your wants.

Do you really need three clothing ­accounts? Do you really need the very latest cellphone? What you really need is a strong balance sheet and a clean credit record so you can start to build real wealth, not just the flashy sort.

Income risk

Because you’re working today does not mean you will be working in a month’s time. Economically, South Africa is still going through tough times and there were a lot of retrenchments during the first three months of this year.

A really frightening statistic is that 60% of people under the age of 25 are unemployed.

This basically means that if you lose your job and you have opened clothing accounts, or you’re paying off a cellphone, computer or a car, you may be in trouble.

Remember that taking on debt is a serious commitment. Before you do that make sure you have short-term savings that can cover your bills for a few months should you lose your job.

Get advice
A salary slip opens doors for you, but Woolworths, for example, doesn’t know if you’ve applied for accounts at Foschini, Truworths and Queenspark.

The excitement of having a lump sum dropping into your account at the end of the month could blind you to the fact that taking on debt is always a risk.

It could also blind you to the need to put away savings each month.

The best thing you can do is proceed with caution and take sensible advice from people who have “done it right” – your parents, your money-savvy peers or a member of your community who leads by example.

Questions to ask before taking on debt
» Am I financially stable enough to make regular monthly payments?

» Have I been in my current job for more than six months and have I lived at the same home address for more than six months?

» Will I be able to pay my bills on time?

Am I responsible and disciplined enough to remember?

Do I have debit orders?

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