Invest your first pay cheque

2012-02-18 12:38

Kwadzanai is a 26-year-old university graduate who recently started working as a teacher and, like so many job starters, he wants to make the right decisions from his first pay cheque to ensure that he manages his money responsibly.

“How much am I supposed to save? I would also like to buy a second-hand car of around R50?000 and my aim is to have paid it off within a year,” writes Kwadzanai.

“Kwadzanai is fortunate as he does not have many money expenses and can use this opportunity to boost his savings and put the necessary financial plans in place,” says Lizl Budhram, advice manager at Old Mutual.
Kwadzanai lives across from the school, which pays for his accommodation. So he has no rent or transport costs apart from an electricity and water bill of around R300 a month. This allows Kwadzanai to focus on his savings.

“How much any person should save depends on that person’s personal circumstances and future financial needs and plans,” says Budhram, who recommends the following two steps:

» Firstly, determine what expenses will need to be covered every month. Even if you are still living at home you may be required to assist your parents with some form of rental.
» Once the necessary monthly expenses have been finalised, a budget should be drawn up to ensure that the expenses do not exceed the income.

Ideally, the income should exceed the expenses, resulting in some income, which can then also be contributed to a savings vehicle or investment.

But the saving of your “left over” cash should not be the only saving in the budget. You need to also have a plan to save for future purchases, such as the car Kwadzanai wants to buy. He also needs to be putting away some of today’s income to support him in retirement.

These savings amounts should then be included in the necessary monthly expenses of the budget. If you are able to save 20% of your income each month, you will be able to create long-term wealth. You will have to divide those savings over emergency savings, medium-term savings for goals like a car or a deposit on a home, and long-term savings such as retirement.

Budhram’s recommendations:

Emergency fund: His first goal is to create an emergency fund. An emergency fund is a fund more or less equal to three months’ income and its purpose is to cover the unforeseen expenses which may arise as a result of an emergency, such as trip to his home town for a family event (birth or death) or perhaps unforeseen and uncovered medical expenses. This will ensure that he does not have to pull out a credit card or dip into the savings for the car or for retirement in the event of an emergency.

Medical cover: Kwadzanai does not mention whether he is a member of a medical scheme. If not, this is one of the most important financial steps. Accidents, medical emergencies and expenses can arise at any time and the costs can be very significant. It is important to get appropriate medical cover in place to make provision for such events.

Life cover: He does not currently have any dependants or debt, so at this life stage life cover does not need to be a priority. He should, however, protect his earning ability and should consider obtaining cover for loss of earnings due to disability and severe illness. The exact amount of this cover needs to be calculated by a financial adviser taking his detailed needs and situation into account.

Since he has recently acquired a number of new appliances and furniture, short term cover of these assets should also be an important consideration.

Retirement fund: It is likely that Kwadzanai is part of a pension fund through the school. He should select the maximum possible contribution as this is an excellent tax-efficient way to save.

The younger one starts saving for retirement, the better the chances are that sufficient funds will be available at retirement due to the fund being greatly enhanced by the effect of compound interest over the longer term. How much one needs to save for retirement depends on the intended retirement age, how much retirement income one would like to have and, of course, also how much one is able to save for retirement. If you start young and save for your retirement for the next 35 years, then around 12% of your salary would provide a very comfortable retirement.
The key here is that Kwadzanai never cashes in his retirement fund when he changes jobs.

Buying a car: As Kwadzanai has very low living expenses at the moment he can use this opportunity to save for a car. It should be possible to save sufficient funds to use as a deposit for a car, assuming that he is prepared to wait about three to six months before buying the car.

The deposit for the car is a short-term saving and therefore a short-term, liquid, interest-bearing investment vehicle, such as a fixed deposit account is likely to be suitable.

The balance of the purchase price of the car can then be funded by a bank. The only way to determine which bank would give the best finance terms would be to approach each of the banks and to see what they can offer in terms of vehicle finance. Kwadzanai should aim to pay off his car as quickly as possible in order to minimise the amount of interest he pays to the bank.

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