2016 is not a year that humanity will look back on fondly. Between Brexit, the death of Prince and Muhammad Ali, the US elections and Harambe, it’s probably fair to say that there was more than enough to complain about during last year. On a personal level though 2016 was a fairly good year for me – I got married, was part of a successful year at FMI where I work, and I turned 30.
For someone who considers themselves fresh out of high school, turning 30 felt like a massive milestone. I couldn’t help but look back at my twenties and evaluate how they went. While I had a lot to be happy about, my biggest regrets were around some of my past financial decisions. The reason they are my biggest regrets is that I would be in a significantly better financial position today had I made better decisions.
So for those of you who haven’t turned 30 yet, I have summarised what I believe were the three biggest financial mistakes I made in my twenties. And if your twenties are in your past, I believe these are still pretty big mistakes to make at any age.
Mistake number 1 – Bought property stupidly
In South Africa, it is considered blasphemous to say that buying the property you live in isn’t automatically a good idea. A few years back I did some back-of-the-envelope calculations comparing buying and renting a property and I wrote this. While it might sound like I’m anti purchasing your home, I do believe that in the right circumstances it can be an excellent decision. In 2012 I bought my first property; the only problem is that the circumstances were all wrong.
When I walked into my first property I fell in love with it. High ceilings, beautiful floors and a garden with a pool – it was perfect. The asking price was pretty much the most the bank was willing to lend me, so I bought it.
Five years on and I had definitely fallen out of love with it. Between the high bond repayments, the rates and levies and the cost of keeping a pool blue, the monthly cost of owning a property was eye-wateringly high. An honest review of these costs with my then-fiancé confirmed that if we lived somewhere cheaper we would be much more comfortable financially. So we made the decision to sell and move somewhere cheaper.
But property is a good investment right? Surely it was worth more five years after I had bought it? Unfortunately not. What I paid for my property, plus the cost of alterations I made, was considerably less than what I managed to sell it for after living there for five years. Adjusting for inflation the return on my investment was even worse. Finally, when you consider the transactional costs of buying or selling a property (commission, transfer duty and lawyer’s fees) I want to kick myself over the amount of money I wasted.
If I had bought a more modest home all those years back, less of my salary would have gone towards financing and maintaining that property – I could have saved more money every month (see mistake number 3). If the value of my (smaller) property hadn’t increased, I would have been much less exposed to a less expensive property.
If I could say one thing to twenty-year-old me it would be this: the maximum amount a bank is willing to lend you to finance a property is not a target. Don’t allow yourself to be swayed by how a property makes you feel; let the numbers decide for you.
Mistake number 2 – Didn’t budget (at all – not one cent)
While mistake number 1 had the biggest financial impact on me today, mistake number 2 is definitely the stupidest. Up until about two years ago, I never budgeted at all. I had no idea where any of my money went every month. My only saving grace was that I had set up an automatic monthly transfer of part of my salary to a money market account.
The biggest problem about not budgeting is that you aren’t aware about how much of your money you are wasting. When I eventually went through my expenses, I was shocked into action. Budgeting made me more disciplined with my money and helped me put into place strategies to waste less.
The most blatant waste of money was around food. While I was a bachelor I rarely cooked. Breakfast every morning was whatever I could get from Vida café, I would go out for lunch every day, and dinner was takeaways or a meal from Woolworths. I estimate that the cost of this diet was around R100,000 more than what it would have cost to have just bought my food and cooked myself. That’s an incredible about of money to spend on convenience. The week after I worked this out from my budget I was shopping every week at Pick ‘n Pay and following a disciplined routine of home-cooked meals. I don’t think I would have made this change if not for seeing the results of my first budget.
I’m a bit of a control freak, so I go through every transaction from my account and assign them to different expenses. If that sounds like hard work, you should definitely check out 22seven. It links to your account and does a fairly good job of categorising and displaying your expenses.
Mistake number 3 – Didn’t save enough
You don’t have to look too far to find a report lamenting the poor savings culture of South Africans. While it’s understandable that many South Africans just cannot save because they live hand-to-mouth, I still believe that one of the biggest obstacles to saving is a question of your attitude towards putting money away.
Yes, it is difficult to save money in your twenties. It’s likely to be the time of your life when you’ll be earning the least, and any money you want to save has to compete with the cost of experiences that we want to have. But even if you feel like you’re not saving much in your twenties, it is important that you save something.
Why? Because one of the most important aspects of investing (and one of the easiest for you to control) is how long you are invested for. The money you invest in your twenties is the money that will probably stay invested for the longest, which will be most impacted by the power of compound interest. This powerful example is commonly used to illustrate how someone who starts saving earlier and then stops can end up with a much larger investment than someone who starts later and invests for a much longer time.
While I did save some money in my twenties, I know I could’ve saved more. I also don’t think that saving money requires you to deny yourself of everything you want. Looking back I believe that you need to choose what are the one or two things that make you the most happy, and what else is just a nice to have. While I would always like more fashionable clothes, a faster car or more expensive furniture, what makes me the most happy is going to concerts. If I had spent my disposable income on concerts alone and saved the rest, I probably wouldn’t have been any less happy, and I also would have saved a lot more.
If you’re looking to start saving but just can’t see how it’s possible, I would check out Stash. Every time you spend money Stash will transfer a small amount of your money to your tax free savings account.
So those are my mistakes. While it still irks me that I made them, I have committed myself to making better decisions in the future. I’ve moved to a smaller home, I review my expenses every month against the targets I have set, and I aim to save the most I can every year. Hopefully in ten years’ time when I sit down to write about the financial mistakes I made in my thirties I will have very little to write about!