The focus of this My money, My business, My life series has been on how to spend your salary. We then did three important things:
- We looked at the big picture (see the table/calendar above) to make sure that we kept the three zones of life in mind, always, always, always.
- We developed a working budget to help you monitor what you spend your money on, and
- We developed a troubleshooting budget. Recall the MASTER plan.
ALSO READ : My Money, My Business, My Life: A trouble-shooting (or diagnostic) budget
All this we did with the goal of spending only R6,000 (an ‘example’ salary), and no more than R6,000. In other words, if you spend no more than your salary each month, you should keep out of debt. That’s the theory. In practise, thousands of workers get into debt they cannot repay. Why?
Say that you just got married, and you require R10,000 to buy all the big items you need for your new kitchen. You don’t have the cash, so you are forced to ‘buy’ that money from a bank. ‘Fine,’ they will say, “But you’ll have to pay us an extra R15 for every R100 you borrow. That’s an interest rate of 15% per year – it’s the cost of money when we lend it to you. So the extra cost of the R10,000, paid back over a year, will be R1,500.” If you don’t pay back in a year, every R100 would grow to R115, and you’d now have to pay interest on an even higher amount. This system is called compound interest – you pay interest on interest.
You think about this, and then realise that you could save R883 per month for a year, and use your own cash. This will save you R1,500 in interest. (Money, if borrowed, costs R15 per R100.) But it’s too late; you need your kitchen now, and you haven’t read My money, My business, My life.
So interest (the cost of money) depends on whether you are borrowing it (very expensive for you) or lending it (very profitable for the bank as lender) – and the duration of the deal. Three points arise from this.
- Debt must be paid off as quickly as possible, or the balance owing can grow to many times the amount borrowed, because of compound interest.
- Increasing the monthly amount you pay towards debt will shorten the duration, and reduce the amount of interest paid.
- Debt must be taken on with the greatest of care. First prize is to save the money first, and then buy for cash. Second best is to take on ONLY debt you can budget easily for, from your salary, WITHOUT affecting any other essential spending.
If you use your monthly money to buy unnecessary stuff (like another pair of shoes, another cell phone, and so on) that loses value the instant you leave the store, you won’t create wealth. And if you buy unnecessary stuff with borrowed money, you’re in double trouble. You don’t ever want to go there.
Did I say something about creating wealth? Indeed, yes. We will go into details in our next blog.
Jay Pillay’s first two critical decades were spent where his first decade began – in Pietermaritzburg. After studying at ML Sultan Technikon in Durban (anyone remember that place?), he then joined the sugar industry, working in Tongaat, Durban, and Xinavane – a sugar mill village 120km north of Maputo. Oh yes – there was a brief period of unfaithfulness, when he flirted with aluminium in Richard’s Bay. Upon retirement, he and his wife Dorothy – settled in Southport.
Jay began writing about salary management (for ordinary people living on a salary) in the early 2000s. Many of his articles were published by The Ripple Effect, a Durban-based corporate newsletter. In all his writing, Jay says he attempts to emphasise the big picture in salary management: it’s not just about making it to your next payday – it’s about making it to the end of your working life. It’s not just about your working life – it’s about your retirement too. It’s not just about the cost of living – it’s about the cost of dying too. It’s not just about you as a salary manager – it’s about your dependants too.
This 16-part series is being published here for the first time. It would be invaluable for salary managers in the early years of their lives – who realize that salary management is a lifetime business. Finally, it’s not just about reading stuff on salary management – it’s about careful thought (that means time, well invested), and then taking appropriate action.
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