Noel Whittaker's Blog The start of the year is a great time to think about your finances and make plans for the next 12 months. Given that people have different needs at different stages in their lives, I’ve written today’s column for the under-25’s. Next week will cover the 25- to 45-year-olds, and the plus-45’s have the week after that.
They say “youth is wasted on the young,” but don’t be one of those who waste the precious opportunities that youth offers. It is the perfect time to be laying the foundations for good money habits and putting the miracle of compound interest to work. Getting it right early can literally be worth millions to you over your lifetime.
There are three habits necessary for financial success: first, spend less than you earn; second, increase your skills so as to improve your income; and third, invest the surplus wisely.
Spending less than you earn sounds simple, and it is simple – but it’s definitely not easy. There are just too many traps lurking along the way. The main one, by a long shot, is the credit card. And like many bad habits it starts slowly. Unfortunately, as soon as most young people experience the ease of making purchases on a credit card, they use it more and more. But spending money on credit cards never feels like spending real money. That is why people’s normal reaction to their monthly credit card statement is: “How could all those small transactions possibly add up to such a big amount?”
Most people lack the self-discipline to handle credit cards. This is why, in Making Money Made Simple, I emphasise that the easiest way to avoid spending more than you earn is to give up using a credit card and use a debit card instead. These days, a debit card can do almost everything a credit card can, but it can’t get you in over your head, since it only allows you to access money you already have in a bank account.
You also need to learn the difference between good debt and bad debt. This is essential because financial winners borrow at low rates of interest to buy quality property and shares that go up in value, while financial losers borrow at horrific rates of interest to “invest” in consumer items that are virtually worthless the day after they are bought.
Don’t fall into the trap of thinking, “When I start to earn more money, I’ll manage it better.” You almost certainly won’t. Usually, there is no relationship between how much people earn and how much of it they keep. Spending less than you earn is a habit you can learn whatever your income.
To learn about and practise saving, I suggest you open a RAIZ account, which has a great app to teach financial skills and enables you to start investing with very small amounts and watch your savings grow.
The strategy that goes hand-in-hand with all this is to become good at setting and achieving goals. At first, it’s not so much the goal that matters, as developing these skills. Maybe your first goal is to accumulate $1000. After you achieve that, you save enough money to buy a car. After that it may be a house deposit. If you become an expert at setting and achieving goals at an early age, you virtually guarantee your financial success.
Don’t be scared to have a go – this is the time of your life when you can afford to make mistakes. And you learn much more from your failures than your successes. If you don’t fail now and again you aren’t stretching yourself, and if you don’t stretch yourself you will never reach your potential.