Transitioning from student to employee is an exciting milestone. I can still remember receiving my first paycheque; I wanted to share some of it with my family in recognition of the sacrifices they made for me, and then spend the rest! Looking back, I had little to no knowledge about how to deal with my finances as I began working. Some guidance would have saved me much trouble. I offer that to you now.
A budget is your foundation
Keeping a budget is possibly the most important piece of advice I can give you. Without it, your financial journey will be fraught with danger. Every single decision you make that requires you to reach into your wallet must be made with your budget in hand. Doing so will ensure you don’t spend more than can afford — known as living within your means — and that the money you work hard to earn isn’t wasted on the wrong things.
This is easier said than done because we all want nice things and credit (which you’ll have access to once you start earning a salary) allows us to buy things we can’t afford. Many of you will have family members expecting a piece of your salary. It’s advisable that you share your budget with them so they understand the realities of your financial position. So, what do you need to provision for in your budget?
Start saving for retirement from you first paycheque
Your working career will likely be very long, so find something you like doing! But just as important is the discipline of saving for retirement. We all want financial freedom, to be able to live without worrying about money. The sooner you start saving, the faster you’ll reach that goal. Many employers will have a retirement savings scheme (usually a pension or provident fund) that you can join; some employers will even make contributions to your retirement savings as part of your employment contract.
One of the great benefits of this discipline is that the amount you save can be used to reduce the tax you pay, which at the end of the day, puts more money in your pocket. Who doesn’t want that? If your employer doesn’t have a pension or provident fund, you can look at saving into a retirement annuity or a tax-free savings account. A financial advisor will be able to help you choose an appropriate option. You should aim to save between 15-20% of your monthly salary. Make this the first expense that comes off your paycheque every month so there’s no temptation to spend it.
The most important insurance to take out
Generally speaking, you won’t need extensive insurance cover as a graduate because you won’t own much. Don’t worry, you’ll get there. But the two types of insurance you do need are income protection and medical aid cover. The income protection will insure your income in the event of temporary or permanent disability. This means you’ll still have an income to live off, ensuring you don’t become a burden to others. The medical aid will enable you to be treated at a private medical centre for medical needs such as hospitalisation, dentistry, and other procedures. Private healthcare can be very costly so this can be highly beneficial. There are several options you can choose from based on your budget and your needs. They range from hospital cover only to fully comprehensive.
Your employer might provide either or both of these covers for you. If not, you’ll need to take it out in your own capacity. To make sure you get the right cover, at the right price, I’d encourage you to consult with a financial advisor. Insurance contracts can be complicated.
Saving for emergency
As a student, you might have called a family member when there was an emergency that required money. That may be a difficult conversation to have now that you’re working. It’s important to have savings (outside of your retirement savings) that you can use when unforeseen expenses arise. Ideally, you need an amount in your emergency fund that equates to at least three months of your salary. When you have to pay an excess on an insurance claim, or get your car repaired after a bumper-bashing, or pay for a medical expense, or to sustain you if you lose your job, this fund will take the stress out of those situations. This fund can be built up slowly over time — include the necessary saving in your budget.
Buying your first car
If you can avoid buying a car, that is the best decision to make. The interest payments on vehicle loans are expensive. Cars also cost money to run (petrol, services, and insurance), and they start depreciating in value as soon as you buy them. They’re the opposite of a good investment. That said, having a car might be necessary for you to perform your responsibilities at work. With safety and fuel efficiency taken into account, buy the cheapest car you can get. Sure, a nice car, is, well, nice. But after a month the novelty will wear off and you’ll be left with big monthly repayments, high insurance bills, and costly services. If you can delay the purchase of a vehicle, save the money you would have spent (monthly instalments, petrol, insurance, etc.) and then buy your car in cash. Either way, start provisioning for these costs in your budget from day one.
How to deal with credit
Credit allows you to spend money now (that you don’t have) and pay it back later. This facility will be available to you when you start earning a salary or wage. It can be useful, but it can also be very harmful if used incorrectly. Generally speaking, you only want to use credit to purchase assets. Borrowing money to buy a house is the most common example. In this instance, you’ll pay interest on the amount borrowed until you’ve repaid the loan. But at the end of it, you’ll have an asset in your name; you’ll have built wealth using credit. You want to avoid using credit to buy discretionary items like clothing, or furniture. Again, you’ll pay interest until the amount borrowed is repaid. But that interest rate will be higher because the loan is seen as riskier. And at the end of it, you don’t have an asset to your name. You’ve spent money and generated no wealth for yourself.
It’s important to note that interest rates on credit are often negotiable; source a few quotes and get the credit providers to bid for your business. Most credit providers lend responsibly, but it’s still critical that you understand the terms of any credit agreement. Get your financial advisor to help you when you’re considering your options. They’ll be able to spot any irregularities, saving you money in the process. Lastly, always make sure you pay your monthly instalments on the money you’ve borrowed. This will help you maintain a good credit score which will, in turn, gives you more access to credit (at lower interest rates) should you need it.
Be realistic about your relationship with money
No one manages their finances perfectly. You will make mistakes. But avoiding the big errors by following the advice I’ve laid out above will put you in front of the pack. If you need guidance on these topics, talk to a financial advisor — they will be able to help you. Realise too, that managing your money is an ongoing process that takes discipline. But develop a good relationship with your money early and you’ll reap amazing rewards throughout your life.
This article first appeared on Moneyweb.co.za and was republished with permission.