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Dear 25-year-old me …

Financial lessons I wish I’d learnt then (and some I did).

Seven years on, there are some things you should’ve just started doing then (and others you should have not done). Being in your early thirties, its still not too late to undo many of these mistakes, but its going to take a lot more discipline and effort than it should have if you’d started in the late 2000s. (Good luck catching up on that compounding of savings you missed out on!)

Buy a house as soon as it’s practical to

It sounds easy: stop paying rent (effectively someone else’s bond). But, you’ll argue that in your mid-twenties you don’t really have too many options. Thing is, you do. I’m not suggesting you should’ve tried to buy a house while earning R10,000 a month or in month one of your first job. Share an apartment/flat/townhouse with a friend for a year, and save, save (and save some more).

When you are able to buy, figure out what you can afford and then buy a house that’s 20% or 30% (or more) below that. If you can – at a stretch – afford an R800,000 house, for argument’s sake, rather look in the R550 000 – R600 000 price range. This is a very difficult decision to force yourself to make. It might mean a smaller place… it might mean your third- or fourth-choice area. Trust me, you’d be smiling now.

Once you’ve bought this house, pay it off as quickly as possible. Again, far easier said than done. It means drawing up some goals and ruthlessly sticking to them. Instead of partying and eating out every weekend, trim that back to every other weekend, and put the excess in your bond. Unexpected money at the end of the month? Don’t rush off and spend it on a new pair of shoes. You weren’t expecting it anyway. Into your bond it goes. And don’t ever touch the extra money in your home loan (the banks want you to, its why they’ve created these single current-come-mortgage accounts!)

Had you gone this route, your first house would’ve been paid off by now. It is easily doable in seven years.

Buy a car below what you can afford

Looking back over the last seven years, you did achieve this, but it is arguably harder than the house decision. We all want the latest GTI or new Polo or BMW. Figure out what you can afford (knowing that you’ll be rather liberal with your calculations) and then buy a car 30% or 40% below what you think you can afford. This means driving a VW Polo instead of that GTI you reckon you might be able to barely afford. And stay very, very far away from any balloon payments or residuals or anything beyond a good, old-fashioned installment sale. It also means not “trading up” (read: losing R100,000 or more) every three years.

Like with the house, pay off said car as quickly as possible. If you’re spending less than you think you’ll be able to afford on both a house and a car, you should have some extra money to throw at each every month. And after your next pay rise, you should have a little bit more extra each month (versus the trap that most young middle class South Africans fall into – where they can finally afford their car and house after two years of struggle and a ballooning credit card). Once your car is paid off, don’t rush off to buy another. That extra R3000/R4000/R5000 a month could make your bond disappear (and your savings pot grow) far quicker than you think.

Get rid of your cellphone contract

Well done for realising prepaid is cheaper over three years ago. You do not need a contract where you’re spending close on (or over) R1000 a month simply because you had to have the latest iPhone or Galaxy S device. You especially don’t need the second or third contract! Many people fall into the trap of choosing the phone first and then finding the cheapest contract for that phone. This means they’re more often than not on one of the most expensive contracts (out-of-bundle) without even realising it. Cancel your contract. Move to prepaid and then set aside R200/R300/R400 a month in a savings account to fund the outright cash purchase of your desired smartphone every two years. Sell your old phone to fund the shortfall. Being on prepaid also means carefully managing your spend each month. This all requires discipline. (Alternatively, buy your device via a bank-structured smartphone plan. You’re effectively paying it off, but pleasingly it gets you away from having a contract and the punitive pricing.)

Review your expenses (at least) once a quarter

This is critical. A once-a-year springclean of your finances is simply not good enough. As part of your monthly budgeting process, interrogate every single debit order and figure out where you’re spending all your money. You shouldn’t have dozens of debit orders (you shouldn’t even be in double figures!). Keep an eye on your renewal dates for things like car and household insurance and get these revalued (read: adjusted down). If your current provider won’t budge, shop around. Figure out how to get your banking done most cost-effectively. Be wary of the all-in bundles that every bank is hawking (more about that soon).

Well done, you’ve gotten very good at doing all of this.

Save!

I’m not going to prescribe exactly where you should be saving your money (this is a topic for another day). But leaving money in a cheque account is not saving, neither is putting it in a savings pocket (you’re earning little to no interest on your money which is downright punitive). What’s most important is that you are disciplined about saving. Set yourself a goal and meet (or exceed) it. The challenge is to make sure you’re saving while also paying down your house and car as quickly as possible. This is a balancing act… it’s not one thing at the expense of others. Make sure you increase the amount you’re saving every year (in line with your pay increase). The tax-free savings accounts which will be introduced in the next month or two are going to be the most-obvious and simplest place for you to save. How I wish these were available when you were 25. Then again, that Capitec savings account did ok!

It’s guaranteed that your personal balance sheet will be in a much better place today than it is if you’d been disciplined about all these things over the past seven years. You succeeded on some but failed on others (or missed them completely). Catching up is very hard, but at least you’re aware of your mistakes and have doubled your efforts.

Now, on to the next seven.

* Hilton Tarrant works at immedia.

** This does not constitute financial advice, rather it is insight into what’s gone right and wrong during a period where he (and anyone else this age) should be building wealth (not debt).

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