So you just started earning a salary? What now?
I remember this day like it was yesterday. Four years ago I had just landed my first job at an awesome company called Retro Rabbit. Sure, I had the occasional odd job before landing the first real job of my professional career, but up until this point I never had to think about actually planning a financial future.
When starting to work you hear lots of talk about retirement annuities (RA's) and personal savings. Sure it’s fun to spend and flex that cash because you have some money right? Why not! But, here’s the cold hard truth: you need to start thinking about your financial future, even from the very first paycheck!
So you are probably thinking, this man is nuts. Why should I start worrying about something that will only affect me in 40 years? Well, the answer is simple, you need to look at the numbers.
The average age of retirement in this lovely country is 60. People that start their post-grad careers are often in the age range of 22 to 24, hence you only have about 40 years to get a nest egg ready that you have to live off for the rest of your life. According to studies, to retire comfortably you need to have saved up at least R1 million for every R5000 you want to have as a salary in retirement. And if you will be living a certain juicy software developer lifestyle you will need every cent of it.
If you start saving from your first paycheck, you will get into the habit of contributing to an RA and it will become easier and easier to secure a good future.
So how much do I need to save and where?
So the general rule of thumb is that you need to put away 12–15% of your monthly income before tax to retire comfortably. This money should go to a retirement fund. Don’t see it as money that just disappears on your payslip, but rather see it as money you never had. This helps with the “trauma” of earning 15% less than you thought you would.
We save in RA’s because their growth is meant to supersede inflation by investing your money in a variety of stocks and bonds that grow with the economy as opposed to a fixed 4% interest rate (if you are lucky in this day and age). The best part is, it’s all tax-free!
Ok, we are making good progress. You are now taking your first steps to ensure you and your family will be cared for in your old age, where medical bills and cost of living will be significantly higher. Why will it be higher you ask? Because you won’t be the flexible juggernaut who can take 6 shots of Jägermeister and tumble down a flight of stairs then walk away with a funny story. Because you will be a fragile 65-year old that hurts their back trying to reach for the tv remote.
The next step
Now that we are already investing in a RA, we need to figure out how to put our eggs into different baskets to make our short-term future as good as it can be. You might not realise this, but your life is about to change in the next 10 years or so. You might not bet on it, but you might get married, buy a house or have a baby soon.
Let’s get into it, saving is a lifestyle, not something you do some months when you feel like it. First of all, always prioritise paying off debt. Credit interest rates are usually much higher than savings interest rates, so you are technically saving money when paying off debt as quickly as possible. The second thing you have to do every month when you get your salary is to not let it sit around, make your money work for you. Take what you receive and immediately pay off all of your monthly expenses accrued on the credit card from the last month (we will talk about credit cards soon) and also account for the debit orders that still need to be paid for the month to come. What we are left with now is what you have to work with; this money is supposed to cover your living expenses for the month but your savings also come out of this pile.
Look at your financial history and see how much you typically spend every month on the cost of living to determine how much you need to keep around. The rest should be saved immediately before your month starts. There is a lot more money guilt when you spend from a savings account compared to spending from a current account and this is good because this way, you won’t be tempted to spend the money. The goal with short-term savings is to at least have 3 to 4 months of salary saved up and ready to go if there are any emergencies that need money. Like car repairs, home purchases, etc or you know…a new PS5.
Some good tips to know early on
I wished someone would have told me the importance of having a good credit rating. You might think not having any debt is a good thing, but in fact, it is not. If you don’t have a good credit rating you will not be able to borrow money from a bank at a good rate or in the worst case, even borrow money at all. But if you want to buy a home or a car you will need to have your credit in good standing.
Now I know what you are thinking, how am I supposed to get a good credit score if I can’t or don't want to get a big loan? The answer is simple. Get a credit card! Credit cards are an essential part of managing your money wisely. Not only does it help to build a healthy credit score, but most banks also reward you for using credit facilities and offer 55 days of interest-free repayment. The important thing to remember is to be responsible with your credit card. The goal is not to spend as much as you can because it has a big limit on it.
The goal here is to use your credit card as you would use your cheque/debit card. Only spend what you have, and at the end of the month when you get your salary, immediately settle the credit card fully. This way your credit rating goes up and you earn rewards from your bank. Easy as pie.
The last step
Now that we have a good credit score and sufficient savings we can start to look at diversifying our savings portfolio. It is important to not have all of your eggs in one basket. Start looking into alternative savings like tax-free savings accounts. These are a great way to save because they are low risk and you are only allowed to save R36 000 tax-free per year, so R3000 per month. And the limit is R500 000 in your lifetime. This means that if you save R36000 per year like this you will reach the cap in 13.8 years, and you will have accrued an average of R137,753 just in interest. This is why compound interest is the 8th wonder of the world.
Other safe types of investments are ETFs and index funds. These are combination investments that consist of many small pieces of global and local shares that usually grow more than traditional savings accounts per year. A good example of an ETF is the Ashburton global top 1200 and an index fund would be something like the S&P 500. These are a great way of making sure your money does not sit around without being productive.
Don't let all of this talk about safety scare you! Don't be afraid to take risks, you can also invest in more risky investments while you are still young. "Risky" investments are things like crypto and stocks, but try to keep these risky investments less than 15% of your net worth.
Thanks for taking the time for the read, just be sensible, save first, spend later. And soon you will reap the benefits.