Having moved to the United Kingdom when I was in my early teens, one of the first things my mother did was to open a bank account for me. She wanted me to use it to save my money and eventually to receive my salary. Fast forward a few years later, I had a job but I didn’t fully understand the cost of debt and how to manage it. In this blog I will be looking at some of the mistakes I have made and the lessons I learnt.
The impromptu holiday
My bank used to phone me and book appointments regularly to review my account. During these appointments they would review my income and then try to sell me their credit products like overdrafts and credit cards. Unfortunately, I thought of this as my back up plan. Then one day, my mum decided go to Africa on holiday. A week before she was due to fly out, I saw her packing and all of a sudden, I also wanted to go. I then remembered that the bank always offered me loans and I never thought of checking whether i could afford the loan or how much it was going to cost me. The next day I went into the bank, got the loan, paid for my ticket and I was ready to go.
Lesson learnt about the importance of budgeting
When I returned from holiday, I was excited and had great memories but I still had a loan to pay back. The loan took me close to 2 years to pay off. By the time I had finished paying it off I had paid more for the holiday than I would have paid in cash. I learnt the importance of having a solid budget that covers everything I need including holidays. If I had planned my finances better and factored in holidays, I could have started saving for the holiday a long time before. Taking out the loan and not creating another source of income was not a good option. Now the only time I consider using long term debt is if I am purchasing an asset that I will end up owning or that has a return that is higher than the interest charged on the debt.
Read How to create a simple and effective budget for more on budgeting
Shoes and handbags, a girl’s best friends
Going shopping was one of my favourite things to do. I had a particular weakness for shoes and handbags. I went into a shoe store one day, looking to see if they had added a new line of shoes to their stock. I found a pair I liked and went to pay for it. Just as I was about to pay for it, the store assistant asked me if I wanted to open a line of credit with the store. They offered me a small discount and this meant I didn’t have to pay cash for the shoes that day. At the time I thought I had struck gold but it took me over a year to fully pay for the shoes. The amount I could have paid for them in cash was far less than what I ended up paying with interest added and the discount I received was out weighted by the cost of the loan.
Lesson learnt about setting effective goals
I learnt that it is important to be disciplined. If I had put in place clear long-term goals, this would have helped me establish my short-term goals and targets. I went into the shop intending to buy a pair of shoes with cash but I was swayed into taking out credit which took a year to pay off. If I had goals in place, I would have known that taking out that credit was not part of my long-term plan and the end goal would have motivated me to say no to the credit. Long term goals could have included raising a deposit to buy a house, raising money to invest. Having goals in place now, helps me to be more cautious about the financial decisions I make and their implications on my future. If I don’t understand something, it pushes me to carry out more research and understand the products before agreeing.
My first car
When I was in my early 20s, I decided to apply for my driving license and I was successful. In the UK, it is mandatory to have auto insurance in order to drive legally and at the time because I was in my early 20s, insurance was expensive. The first few months, I was added onto my mum’s insurance which made it a slightly cheaper and I would drive her car to gain more experience. A family friend came around to visit us one day and advised us that she was selling her car. It was a nice small car which at the time seemed like the ideal car for me. Before she left I had already decided that I was going to buy it from her and I did. All I was thinking about was the “freedom” I was going to have and the excitement of owning my very first car.
The importance of understanding my finances
In making this decision, I had not fully considered how this was going to affect my monthly outgoings. I had to apply for auto insurance in my name, which meant that my monthly outgoings went up. I had to pay for the annual checks, fuel and road tax. This taught me that before buying something that looks like an investment, it is also important to assess how your outgoings will be affected by maintenance costs and if purchasing the item is necessary. It is important to take a step back, ask questions and understand exactly what costs are involved. This is especially important when buying a house or considering moving to a new location.
In going through the experiences, I learnt that instead of shaming myself it was important for me to look at these experiences and learn some lessons.
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