This article first appeared in Framhaldsskólablaðið, the Icelandic Upper Secondary Student Union magazine, in February 2021.
Crime writer Catherine Aird once said, “If you can't be a good example, be a horrible warning.” I don’t know about you, but I think the former of these is far better than the latter. It’s pretty depressing to realise after the fact that we’ve made a major mistake. Mistakes can be an opportunity to learn from experience and do better next time, but they can also be so costly that we may end up with few chances to do better.
The best – and cheapest – option is to learn from others’ experience, and it doesn’t matter whether these “others” have been a good example or a horrible warning. By setting some ground rules, adopting some basic principles, and learning a few simple things, we can greatly increase the probability that we will improve our money situation, at least to a degree, and we can reduce the probability that we will end up in financial difficulties.
Let’s look quickly at 10 tips on money that will hopefully be of some use, particularly to those who have just reached the age of financial autonomy.
Tip 1 – Always have a reserve fund
Believe me, you will thank yourself later if you can manage to follow this rule. If you always have a fairly sizeable sum set aside – say, ISK 100,000 – you can greatly reduce the probability that you will end up having to take an extremely costly consumer loan if you unexpectedly need money. Far too many of us do not have such a “nest egg” when our computer breaks down, Christmas turns out more expensive than we thought it would, we have the chance to travel abroad, or we unexpectedly need money for some other purpose. Decide on an amount that works for you, and if you find that you need to use some of your savings, try to the very best of your ability to put that money back into savings as soon as you can.
Tip 2 – Try to avoid using split payments or instalment payments
This is a terrific rule of thumb: never buy now and pay later, except in the case of housing loans or student loans. More and more options for splitting or distributing payments are being offered, and they are becoming much more accessible than ever before – but this does not make them a good idea. When you buy now and pay later – no matter what the payment plan may be called – you will in all likelihood pay much more for the purchased item than it actually costs. If you don’t want to pay more for your mobile phone than it actually costs, save up for it and pay the full amount when you buy it. If you are forced to take a loan, get advice on which loan is cheapest for you and how you can best pay it off. You can get such advice free of charge.
Tip 3 – Be wary of payday loans
The Office of the Debtors' Ombudsman is an institution that assists people in severe financial difficulties. In 2012, about 5% of the Debtor’s Ombudsman’s clients were 18-29 years old in 2012, but since then, this group has grown fivefold. At the same time, the share of clients who have taken so-called payday loans (also called payday advances, salary loans, payroll loans, small-dollar loans, short-term loans, or cash advance loans) has risen from 6% to well over 50%. Payday loans bear high interest rates and are therefore extremely expensive, and they can be a person’s last port of call before they suffer a total financial shipwreck and cannot recover. As a result, you should try to avoid them entirely.
Tip 4 – Sign up for private pension savings
If you are employed but do not have private pension savings (also called third-pillar pension savings), you are actually being paid 2% less than you are entitled to, and you will not receive tax advantages from the Government when you buy your first apartment. This is why you should sign up for private pension savings immediately, no matter how much you work or how much you earn. After you have signed a contract, 2-4% of your wages are deducted each month, and your employer must contribute another 2%. You can then use this money to live more comfortably when you are older, or you can use it for a tax-free down payment on your first apartment. This option has helped a large number of people.
Tip 5 – Start saving early for your first apartment
If you are thinking of buying an apartment, you should take care not to start saving for it too late. We Icelanders move out of our parents’ home at around age 23 (on average), but we do not buy our first apartment until roughly nine years later. Large numbers of people get stuck in the rental market even though they don’t want to be there because it is expensive and difficult to pay rent and save for a home purchase at the same time. If you are thinking of buying an apartment and are living with your parents, you should at least consider starting to save immediately, while you are not paying rent.
Tip 6 – Learn to read your pay slip
Are you really receiving what you are entitled to? Is your employer paying you overtime when you are entitled to it and contributing to your private pension savings each month? If you know how to read your pay slip, you can keep track of these things. Useful instructions can be found online – on labour unions’ websites, for instance – but you can also ask your employer for assistance.
Tip 7 – See whether you can get by without owning a car
It can be very expensive to own a car. The Icelandic Automobile Association (FÍB) calculates examples of such costs each year, including everything: depreciation, fuel costs, car inspection, insurance, maintenance, etc. Owning a car can cause as much as ISK 1-2 million per year, and if you are saving at the same time, it could be worthwhile to store your car or simply not own one. It might be possible to rent a car for part of the year instead, take taxis or buses, or walk or cycle – and save a lot of money at the same time.
Tip 8 – Find ways to reduce your spending
The first thing we look at when we start saving is reducing our consumption spending. How much do you think you could save by cutting out trips to vending machines, cancelling unnecessary subscriptions, buying more used goods, or taking food from home rather than buying prepared food? When you add it all up, you can save a great deal. This is money you can add to your savings, and it can sometimes add up to very large amounts.
Tip 9 – Save, and help save the environment at the same time
By buying used goods and selling items we are no longer using, we have a very positive impact on the environment, and we can save significant amounts of money as well. But do we really need to buy? A good rule of thumb that many have adopted is this: never buy anything right away. Instead of buying, say, a pair of shoes as soon as you see them in the store, decide to come back the next day. That way, you’ve given yourself time to sleep on it and consider whether you really need those shoes as much as you thought. Try this. It is amazing how often it works.
Tip 10 – Learn to issue an invoice
No all of us receive all of our income from conventional full-time employment. People earn an increasing share of their income from small or large projects that they take on a free-lance basis. This trend will doubtless continue over time. Look for opportunities to use your talents to generate additional income, and make sure you know how to issue an invoice for such work and that you charge an appropriate price.