Been a Late Starter I’ve really had to learn about personal finance for beginners. This is me. Learning the basics, undoing the bad habits and striving for better financial control!
This is the last post in my series on being a Late Starter. So read along as I share (a lot) about basic things I have to know (and do) if I want to fix the mess and manage my finances correctly.
In this post on Personal Finance for beginners we’ll cover the following:
- a high-level reflection of your current situation,
- financial terms “Assets and Liabilities” & “Income and Expenditure”,
- all about debt.
What is your current situation?
Can you answer these questions quickly?
- Do you know what you own?
- How about what you owe?
- Do you know what you earn?
- Do you know what you spend?
- Finally, do you know what all the debts are that you have?
If you can’t give detailed and accurate answers to these simple questions, you need to keep reading.
You too may look at people saving and investing and wonder why you just can’t seem to get there. The answer, as simplistic as it may sound, is you probably don’t know the basics. You’ve probably never known the basics.
That isn’t something to be embarrassed about. I mean, if you think about it, if you’ve never been shown or taught the basics of managing your money, how would you know what to do to get ahead? How would you know that making more money won’t necessarily make you wealthy, it rarely does. My aim in life when I started working was to work hard. I sincerely believed that if I worked hard, I would make money. I believed that if I made money I would eventually be rich. That was my naïve logic. Work hard, make money, get rich!
But it didn’t work, even when I worked harder and made more money.
There are many people who apply similar logic and end up poor, without enough money to retire or without enough money to survive. I think that some of the hardest workers are the poorest old people. I also think that some of the wealthiest people aren’t really hard workers. Something is wrong here!
The answer seems to me, to be that unless you understand the basics of personal finance, you can work as hard as you can – you may just end up poor and tired.
What did your parents teach you?
I’m not sure that my parents really knew how to manage money. I don’t say that to be disrespectful; my kids could have said the same thing about me a few years ago. But my parents never really taught me about money. I think my parents passed on exactly what they knew about money and, had I not decided to start this journey, what I would have passed on to my children.
What did your school teach you?
Do you remember personal financial planning as part of your curriculum? I can’t remember that far back but I am pretty sure school taught me nothing about managing my money. I’m sure things may have changed, I am sure that my kids are being taught something about money – but that isn’t going to help me much.
I’m not trying to blame here. My parents did their best, my teachers did their best. But the reality is that I managed to get through childhood and school without a clue (maybe that’s just me, please don’t judge me). When I started earning money, I did exactly what I saw everyone around me doing – I started spending!
Can we break the cycle?
We need to break this cycle and map a new path for ourselves and for our children. To do this we need to get back to personal financial basics.
Eish, is it that simple?
It can be that simple. If you can sort out the basics, you can build a solid foundation and you can actually make your money grow and work for you. Hence we need to learn personal finance for beginners!
So, what are the basics of personal finance?
This is all you really need to know about personal finance for beginners. Let me tell you again:-
- You need to know what you own,
- what you owe,
- and what you earn.
- You need to know what you spend and,
- what debts you have.
- You need to know what type of debts you have so that you can sort out the bad debts (yip, there are good and bad debts!).
PS. If you are married, the ‘You’ in all of those questions would apply to both you and your spouse.
It is that simple.
When you know what your ‘real’ situation is, when you know exactly where your money comes from and where it goes to, when you really know what your debts are – only then can you start moving ahead. I am not a financial planner (if you need a financial planner you can find one here) but my personal experience has been that I cannot save or invest when I am paralysed by debt (which comes along with a healthy dose of anxiety, which paralyses even further).
Personal finance for beginners, terminology
Assets and Liabilities
You can make a very simple start to the basics by just knowing your current situation. Do you know your assets and liabilities? These aren’t scary words, they are important words. Often, when we battle with money, we stop just there, believing that we don’t have any assets and therefore this ‘personal financial planning’ is for other people.
Please don’t beleive that. If you don’t have assets (or if you don’t really understand what assets you have) you may still have liabilities and you need to gather accurate and detailed information so that you can fully understand your assets and liabilities.
Assets are those things you own, that have monetary value. These may be a house you own, your bank balance, an investment or some cash you have buried in the garden (we know you do that!). Assets are things that you could sell for money but it excludes “household stuff” like clothing, pots & pans, furniture (unless they’re really worth a lot of money).
Liabilities are simply your debts, what you owe and have to pay back. This may be your credit card debt, retail accounts or loans you have to pay back.
Income and Expenditure
You will need to know exactly how much you earn and how much you spend. This sounds so simple but very often we understand what we earn but we don’t (and we often don’t want to) understand what we spend.
If you take your after-tax income and deduct all of the expenses that you have to pay each month (rent or home-loan repayment, travel to work costs, utility payments, your food costs, school fees, your phone costs etc.) you will get to a value that we will call ‘What’s Left’. Don’t include any of the take-away food costs, going out with friends costs or luxury items spending in your ‘What’s Left’ amount.
If you have done this properly you now have an accurate view of what you money you have left each month. Now you need to work out the best way to use ‘What’s Left’.
All about Debt
You need to distinguish between your good debts and your bad debts. This is a pretty simple (but really important) thing to do. You want to kill the bad debts as quickly as possible. Bad debt is the silent cancer, eating away at your future finances, robbing Future-Me of joy.
What is bad debt?
Bad debt is any debt that doesn’t build your wealth. A good example of bad debt is credit-card debt. Credit-cards are rarely used to finance anything that will increase your wealth. On top of the fact that we use credit cards to pay for things that we don’t need and can’t afford, interest rates are extremely high.
You will need to work out what ‘bad-debt’ you have. Bad-debt is where you have borrowed money to buy something with no long-term value. This would be retail credit card debt for example (paying for groceries on a store credit card and not paying within the required time and thus incurring high-interest rates). Bad-debt usually carries with it high-interest rates, will never increase your wealth and will never provide an income. In contrast though, good-debt is debt that is building wealth. This may be a home-loan for example (where you are paying off an asset).
To move forward meaningfully in your financial journey you need to deal with this bad debt. You need to identify your bad-debt (do you know the interest rates on those credit cards of yours?) and you need to deal with your bad-debt.
If you need help with this, download the worksheet. Help! Where’s my money gone?
If you are really serious about changing your circumstances, your financial situation, your life – you need to come to terms with the details of what you own and owe, what you earn and spend, your good-debt and your bad-debt. When you know these things you can move forward. The road to saving and investing is ahead.
Debt is an expensive habit
Bad debt is a very expensive habit. But don’t take my word for this, take a moment to consider the following extracts from an article I found here.
“Credit card debt in South Africa is so expensive its costs dwarf any benefit of saving for people who are paying off their cards.”
“Assume a scenario where you have credit card debt of R80000, you can only afford to pay R2000 a month towards this debt and you do not make any further purchases. It will take you almost six years to pay it off at a typical annual card interest rate of 20.75%. By the time you have paid off your credit card debt, you would have paid about R57250 in interest – 72% of your original credit card debt.”
“Although the numbers indicate that it is best to pay off debt first, if you follow the typical consumer behaviour you almost never get to saving.”
You need to kill bad-debt as quickly and aggressively as possible.
You need to know the interest rates involved so that you can calculate the best debt reduction strategy. Mathematics would suggest that you pay the debt with the highest interest rate first. There are however reasons that you may not want to do this. You may, for example want to set up a (small) emergency fund up first so that, when things go wrong you have some margin.
On my Journey I’ve realised that one of the most powerful, confidence building and positive things I did was to start an emergency fund. Once I had that small margin in place, I realised that I wouldn’t be stopped in my tracks every month when the unexpected happened.
Don’t miss the basics
We are really dealing with personal finance for beginners here. Hopefully you won’t miss the importance of knowing the basics and implementing the basics.
If you act as most consumers do in South Africa, you will continue to service expensive debt. You will never get to saving. The research into South African consumer debt shows clearly that we are so consumed by debt that we’re not likely to ever get to saving.
With basic personal finance knowledge, you can change that. You.
Today I want to end off with some encouragement. The fact that you have read this, the fact that you have taken the time to consider what I have written, is an indication of your desire to succeed. You need to know what basic personal finance knowledge (and action) can do for you.
I want to encourage you to feed that desire with ACTION. Get out your debts and get to know everything about them. This is a war and you have an enemy, get to know him so that you can defeat him.
The knowledge you gain when attacking your current debt will will help you with future temptation to take on more debt. When you know and accept the truth, that debt is an addiction and that it has probably become a disease in your house, you will be far more hesitant to simply pay for something on credit.
Personal finance for beginners in summary
Here is a quick summary of the basics we have dealt with in the past two articles:-
- Know your position (assets, liabilities, income, expenditure, debts)
- Analyse your debt (good debt vs bad debt)
- Create some margin (small emergency fund)
- Kill that bad debt!
- Create more margin (larger emergency fund, other insurances)
Once you’ve dealt with these things you may end up in a position to start saving. You may then look at ‘investable money’. Once you have ‘investable money’ you can start building through automatic savings.
You can do this
It may seem a world away, particularly if you have mountains of debt, but when you attack the financial problems with the basics you should see progress. Once you start making progress and you understand that saving and investing is achievable – you can become unstoppable!
This is a long journey we are on and this personal finance for beginners is literally only the tip of the iceberg. It may take months or years to reverse your negative financial status – but you need to be in this thing for the long-haul – you can do this thing!
That is my hope. I am Journey-Man.
Working hard, walking hard and taking drastic action. Not just for myself, but for my kids and the next generation of Journey-Men and Journey-Women.
I hope you have enjoyed this mini-series of how I am taking charge of my money!
Please share with others or comment below if you have found this useful