Make the most of your financial firsts
Cape Town - Your first job comes with important financial decisions. Making smart money moves from day one can set you up for future success.
Farzana Botha, Product Specialist at Sanlam Risk and Savings, says that she wanted to spend her first salary on a car, new clothes and eating out more. Her manager helped her draw up a list of financial goals and priorities, plus a plan for personal upskilling to grow her future income potential. She made a choice that day that changed her life. She says, “I needed guidance to start my work life right and make my money work for me. I needed to form positive money habits with a proper plan in place - a smart financial move for every smart career move."
Understanding your pay cheque
You’ve landed your first job and you’re about to get your very first pay cheque – congratulations! Lee Hancox, Head of Channel and Segment Marketing at Sanlam, says now is the time to get your financial journey off to a confident start. The first step is understanding your gross salary and deductions.
“The thrill of your first job is undeniable, but it's essential to understand that the salary your employer offers you is a gross amount – your monthly earnings before any deductions. Ask your employer to create a dummy payslip to help you understand potential deductions and taxes, ultimately revealing your net or take-home pay.”
Hancox says it's also crucial to know if your employer contributes towards medical aid and pension on your behalf because, if they don't, these necessities will need to be incorporated into your budget.
Botha suggests enlisting the help of a professional financial adviser and using tools to consider hypothetical scenarios of financial choices. Here, she shares three scenarios, potential decisions, and long-term financial consequences.
Scenario 1: You receive your first pay cheque
- Choice one: You celebrate by blowing your salary on beautiful new shoes and a celebratory dinner. Unfortunately, this decision does nothing for you in the long run. You spend too much and your salary doesn’t last until the end of the month.
- Choice two: You put your salary to work by opening a Retirement Annuity (RA) and making your first contribution of R350/ month at age 20. Congratulations, you've tapped into the power of compound interest! Fast-forward 10 years and your RA could be worth R36 980. If you’d waited until 30 years old to start, you’d need to contribute an additional amount of just under R600 monthly to catch up.
Scenario 2: Work offers you the opportunity to meet with a financial adviser
- Choice one: You jump at the chance and, with their help, set solid financial foundations. This includes opening a tax-free savings account, depositing R500 and committing to contribute monthly. Fast forward ten years and your tax-free savings account could be worth over R83,400.
- Choice two: The meeting is at lunchtime, so you decide to give it a miss. You know you probably should start saving, but you're not sure where to start. You leave it for now. You're young, and you think you have plenty of time to catch up.
“In addition to the medium-to-long-term benefits of compound interest, opening a tax-free savings account also reduces your tax burden, much in the same way that contributing towards a retirement fund can qualify you for a tax deduction, subject to certain limits. This reduces your tax liability, leaving you with more money to save towards your financial goals,” adds Hancox.
Scenario 3: Your friend has a health issue and can’t work for three months, unable to earn an income
- Choice one: Your friends’ situation is a reminder that life happens. You meet with your financial adviser to discuss your insurance options and decide to invest in sickness, disability cover and life cover so you can stay on track, no matter what tomorrow brings. Because you're young and healthy, you’re likely to pay lower premiums than if you applied when you’re older. Your financial adviser says something that hits home – with your whole working career ahead of you, the most significant risk you face right now is losing your ability to earn an income. Having life cover is a relief because you know you won't burden your family with your student loans should anything happen to you.
- Choice two: You know you should investigate insurance options, but you have other priorities, like moving out and affording rent. You're young and healthy – you don't think you need cover. Now let's fast forward a year and imagine you hurt your back and can’t work for six months. You don’t have any insurance or savings so your family must support you, which puts pressure on your parents' pockets. You apply for disability cover, but unfortunately, your condition means you now pay higher premiums with extra loadings.
Botha concludes, “It’s important to celebrate milestones like a first job or a promotion, but not at the expense of your future financial security. These hypothetical scenarios show how important one's financial firsts can be. Making wise choices early on can secure a lifetime of financial confidence.”
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