WORLDVIEW: Traditional personal finance advice doesn’t work today

For decades, personal finance experts have recommended the same thing. Save 10-15% of your income for retirement. Get rid of your debts before you invest. Build an emergency savings account to cover three to six months of expenses..But these days, the economy ain't what it used to be – and not just in South Africa. Around the world, young people are taking on more education debt. They're living at home longer and struggling to buy ever-more expensive housing. They're having a tough time finding good jobs and earning less for longer. Almost all workers around the world have seen their wages stagnate for at least ten or twenty years (after accounting for inflation). More and more people rely on debt to meet their monthly expenses. This is all happening in SA and almost every other country on earth..It all adds up to a world in which traditional personal finance advice can seem like the bizarre relic of a bygone era. For twenty-somethings living at home and paying off student loans, saving for a house can seem like an impossible dream. For stressed, middle-aged workers caring for children and ageing parents on salaries that never seem to rise, retirement accounts are not a priority..___STEADY_PAYWALL___.So, how do we manage our money when the global economy has stopped producing rising prosperity?.Forget growing in place at work.When I was young, I was told that the smartest career move was to find an entry-level job at a big company and work my way up to a top salary. This is nonsense. Employers have virtually ceased to reward "loyalty". When new jobs open up, internal candidates looking for promotions routinely lose out to external ones. Salary increases have been virtually flat around the world – wage growth is not keeping up with inflation in most places (SA included). Even though corporate profits are at record highs in most places, workers are not seeing much benefit..So, forget the traditional wisdom that you can grow in place. The single best way to grow your income is to change jobs often and aggressively. US research suggests that people who stay in jobs longer than two years earn up to 50% less than job-changers – mostly because the new hires enjoy sizeable raises while old hands get a few percent a year..With a few exceptions, our company doesn't care about you. If you are good at your job and have good performance reviews to prove it, plan to be on your way to the next big thing every few years. You'll be richer for it..Save as a habit, don't save for a number.The point of saving for an emergency is to use that money in an emergency. Too many people save up a certain amount and then cling to their savings at all costs, choosing to use credit cards to meet emergency expenses rather than dipping into their savings..This is nuts. Set yourself a small and reasonable weekly savings goal – save R200 or R500 a week. And then, when your gearbox seizes up, use your savings to pay for it and keep on saving that R500 a week. The point of emergency saving is to avoid unnecessary debt and smooth out life's ups and downs, not hit some target number and stop..Forget about paying off debt first, invest anyway.Traditional wisdom has it that you should pay off your debts – except your home loan – before you start to invest. This is no longer realistic or sensible. First of all, people are accumulating more debt, younger. Student loans mean that many twenty-year-olds are carrying thousands in debt before they start their first jobs. Below-inflation salaries mean that people are taking out longer-term car loans and taking longer to save up for a deposit on a house. If you wait until all of that is paid off, you'll never start investing..Second, investment returns generally exceed interest rates. So, if your debts are carrying reasonably low interest rates, it's definitely worth putting your spare money into investments rather than debt repayments, because your returns will be greater..Given the reality that most people are carrying lots of long-term debt and earning salaries that are only just keeping up with inflation, it probably makes sense to accept this reality and plan to save within in..Structure your debts so that they're all as low interest as possible, with monthly payments that you can comfortably make. Then, direct a dedicated amount of money into investment every month, ideally in the form of a pension savings account that will save you some money on your taxes. After 20 years, you'll have paid off your loans – and a whack of extra interest – and you'll also have a pot of savings to show for it..In today's difficult economic climate, old school rules won't help much – in fact, they may be a source of stress when you constantly feel like you're falling short. The goal of personal finance today should be to create a financial life that is as low-stress as possible. Don't cut out all your indulgences – living a life of penury is not the point. Don't force yourself to save more than you can afford to. Don't fixate on numbers. Instead, try to live within your means. Accept that you will be carrying debt for much of your life and make every effort to make that manageable. Save and invest as much as you comfortably can. And don't allow your company to take advantage of your loyalty to pay you less than the market rate.

WORLDVIEW: Traditional personal finance advice doesn’t work today

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