Money lessons from the past 5 years

I started as a consumer of Just One Lap’s content in 2016. Fortunately, this was the perfect time for our paths to have crossed. I also stumbled upon My Share Day – JSE: Shoes or Shares with Simon Brown and Bruce Whitfield’s “The Upside of Down” YouTube videos when I started my first job. This convinced me that long-term investing is the way to go. Funny enough, as old as these videos are, they’re still just as relevant today as they were then.

The most important lesson I’ve learned since is that money and everything related to money is much simpler than the financial services industry makes it out to be. Especially when it comes to growing it.

Spending less than you earn

The first lesson is ensuring that there’s something to grow – you can’t compound 0. We might, at times, have limited control over how much comes in, but we do have a say in how much goes out.

And it doesn’t matter how much you earn, the formula never changes:

Income > Expenses = Creates wealth
Income = Expense = Creates no wealth
Income < Expenses = Destroys wealth

It’s easier to go from saving R100 to saving R1,000 per month than it is from R0 to saving R1,000. Getting started is far more important than what you end up buying in your portfolio.

Make no mistake, there’s a lot to learn and reading about money helps, but you will learn the most by doing. In the beginning, it’s very overwhelming to construct an investment portfolio because there are far too many options. Truthfully, any of them has the potential to turn R1 into R2.

In my opinion the goal of saving and investing is turning R1 into R2 at a rate higher than inflation and in a relatively safe manner. Financial vehicles are divided into asset classes, and equity has been the best performing asset class over the long term.

There are countless equities trading locally and globally. It can be difficult to pick the ones that will outpace inflation as a collective in your portfolio. Knowing which stocks to buy and when can be a daunting exercise, and the complex narratives of the financial services industry might make us feel uncertain.

Starting your portfolio

It will matter what you have in your portfolio in the long term. However, results in your first few years will be of less significance. I always recommend starting with anything that’s accessible in an investment account (stick with listed). You don’t need an investment strategy to start. But you will need one in the long term. The strategy you create doesn’t need to be a complex one either. It just needs to be effective and address your money goals.

Though the options are quite limitless, try limiting yourself to ETFs. They are cheaper to buy, cheaper to hold and offer us diversification. It doesn’t really matter which ETFs you buy or how many you buy when you start. As you learn more, you can switch to a strategy you’ve developed over time.

Copying someone else’s strategy isn’t necessarily a bad thing. You do, however, have to own the strategy for yourself. After all, it’s your money that will be invested.

Dealing with debt

The reality is that some of our basic human needs are priced way above our income. Like a house, a car, or a phone. In this sense, debt is a gift and a curse. A gift because it allows us to leverage our income to get stuff we couldn’t possibly get with just our income. We can easily spend a year’s worth of income on one thing, and pay it off over 5 years. The problem is that it takes from future income – taking back a bigger slice than what you initially took. This, in turn, makes it harder to keep expenses lower than your income, as servicing your debt is now another expense.

Just because a realtor says “our affordability test shows you can afford a R1m house” doesn’t mean you should. The option of R700k is still there. It’s the same with phones, cars, clothes, etc. Sure, you’ll be fancy, but these objects will still achieve the same objective as a more affordable alternative.

Lower debt is easier to pay off and takes a shorter time. Once the debt is settled we suddenly have extra income. That’s if we don’t repeat the circle.

Paying off debt vs saving vs investing

It’s tricky because all three are very important. My preference is to do all three by splitting any extra income into thirds and adding it equally to each basket. Now you can reduce your debt over time, build an emergency fund and build your wealth.

Emergency fund

An emergency fund is a “life event” insurance policy where you get to decide the T&Cs. It should be money you can quickly access with ease. Having an emergency fund is crucial, as it protects you from doing things that are not ideal, like selling assets or accumulate more debt to cover the costs of an unexpected event.

5 years’ worth of lessons in a nutshell

Keep your expenses lower than your income
Get rid of debt
Grow money safely, and cheaply (think ETFs)
Protect assets against life events with an emergency fund

Njabulo Nsibande is a Just One Lap user-turned-contributor and a founding member of an investment club. His “Cash Club” blog details his experiences balancing the financial obligations of a young parent with his investment aspirations.

Follow Njabulo’s journey here every month. You can also follow his trading journey by listening to his Village Trader podcast.

Find him on Twitter: @njabulo_goje.