A first pay cheque tends to mark the start of adulthood and, with a bit of discipline, can mark your first tentative step towards financial independence. Phiko Peter reflects on his journey thus far, offering four key takeaways for those starting out.
1. Get into the habit of saving from your first pay cheque
Reflecting on my early 20s I remember being overcome with so much joy and excitement when I got my first job. It felt like fair reward for all the hard work I had put in. I could not wait for that first pay cheque to arrive and subconsciously started spending the money I was yet to receive. When it eventually arrived, all the goals I had set out and the plans I had put in place went out the window. I spent that money so quickly – on what, I cannot even recall.
I promised myself that the following month would be different – to no avail. This went on for about six months before I faced the fact that something needed to change. I had to find a process to help protect me from myself. One of my favourite quotes from Warren Buffet is: "Do not save what is left after spending, but spend what is left after saving." What this meant for me practically, was that I needed to make myself a priority in my own budget by making saving first non-negotiable.
I had already gotten used to my bad spending habits and depleting my entire salary, which made the necessary adjustments very hard. It is far easier to save money when you are not used to spending it in the first place. It also helps to set goals – that way you have a source of motivation and a benchmark to track your progress.
2. Personal finance is personal
I vividly recall having to field questions from my colleagues when I initially started working. Each day it was the same theme, albeit different variations of the question: Where is your car? Why don’t you have one? When do you intend to buy one? My colleagues could not understand why a young man with a good job, working for a respected company, was using public transport to get to work every day. But I had other priorities.
I wanted to buy my mother a house. I could not accept a reality where the woman who had raised me did not have a place she could call home. This not only became a priority but served as a strong source of motivation. Like many, I am the sole breadwinner at home, which means I automatically became my mother’s retirement plan. I also have a six-year-old daughter and my goal for her is simple: She will not grow up having to face the same challenges that I have had to face in my journey. For that to become a reality, I have to prioritise my future so that I do not become dependent on her.
For me, buying a car has never been part of the plan; but it may be a priority for someone else with different needs and circumstances. The biggest lesson here is that personal finance is personal. Circumstances vary and you have to align the financial decisions you make with the goals you aim to achieve. Discipline is also key to success.
3. Avoid bad debt
Once I reined in my spend-as-fast-as-I-can habit and focused on my goals, managing my finances became more orderly. But I soon realised that my salary was simply not going far enough. Instead of having an honest conversation with myself and my family about how much I could afford to provide, I took out loans to support them and my lifestyle.
One of the biggest mistakes I made in my mid-20s was not that I acquired a credit card, but that I maxed it out it in just two months. Rather than saving or investing to buy the things I could not afford immediately, I saw my credit card as an extension of my salary and used it as such. I did not fully grasp the consequences of these actions and spent the next 18 months repaying the debt.
Not all debt is bad, but it makes no sense to pay the high interest rates attached to credit cards when a bit of planning and patience will allow you to buy the things you really need.
4. Let your money work for you
Albert Einstein is often quoted as saying: "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it."
While I initially ended up on the wrong end of that spectrum, I have since realised the error of my ways. It has dawned on me that I will never again have as much time on my side as I do today. I am 29 years old. I realise many people only learn these lessons later on in life, but now that I know better, I can’t help asking myself, "What if I had started investing from the moment I received my first salary? What if I hadn’t incurred debt? Where would I be now?" So, if you are reading this and just starting out, perhaps you can learn from my "what ifs". If they resonate, but you are not sure where to start, consider talking to a good, independent financial adviser.
In closing, I leave you with the following: You are at your most powerful today to take care of the "future you".
This article was published on the Allan Gray Website on 27 July 2020.