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What to do with your first paycheck

11 June 2013 Derick Ferreira, Old Mutual
Derick Ferreira, head of Product Management at Old Mutual.

Derick Ferreira, head of Product Management at Old Mutual.

You are about to get your first paycheck. You can finally buy that brand new car, those famous big brand clothes, the latest smartphone or even that LED TV you’ve had your eye on for months. But don’t forget to also make plans to grow your hard-earned mon

With a poor savings culture in SA, the youth of today are less serious to save for the future. This is evident from the Old Mutual Savings and Investment Monitor stats, which found that 37% of South African youth (ages 18 to 30) consider themselves to be spenders and not savers.

“Becoming an adult and earning your own salary comes with responsibilities,” says Derick Ferreira, head of Product Management at Old Mutual. “That includes ensuring a financially stable future so that you don’t end up being o¬ne of the many South Africans who experience serious financial strain later on in their lives.”

You first need to determine your goals in the short, medium and long term, whether it is buying a car, house or just how comfortably you want to live in retirement. Then you need to gather these thoughts in a financial plan.

Follow these six steps when putting together your financial plan:

1. Draw up a monthly budget

It is important to know where your money is going each month. A budget is a simple process and gives you an instant indication of what you are spending your money on. It will show you what your spending habits are and reveal whether you are taking care of your needs before spending on your wants.

The Old Mutual Savings and Investment Monitor found that 50% of South African youth cannot make ends meet each month. “This is because they fail to get into the discipline of drawing up a budget and don’t prioritise what they spend their money on,” says Ferreira. “Many of us have developed the bad habit of spending money that we don’t have (on credit or account) on things that we don’t need and then end up having to sell or sacrifice what we actually need to repay our debts.

“However, one has to differentiate between ‘good’ debt and ‘bad’ debt. ‘Good’ debt is when you acquire assets – you need to go into debt to acquire the asset, but you will be getting something out of it when it is paid off. ‘Good’ debt is a means to enhance your wealth by acquiring an asset such as property. ‘Bad’ debt is in most cases short-term debt with high interest rates where you will not acquire an asset once the amount is paid off.

2. Consider your long-term goals

Just think… the average South African works for about 30 years of their life. They live for another 30 or more years after that, yet 60% of the youth in this country do not have a retirement plan.

“I cannot stress how important saving for retirement is,” says Ferreira. "This is your most important long-term savings as you still have so many more years to live after you stop working. You still have to pay the bills, medical aid, food etc… I have never heard from customers who complained that they started to save too early. By starting early to save for retirement, you will have a much longer period in which to invest, which means that you can take advantage of compound interest – meaning that you earn interest o¬n the interest already earned.

“It’s tough to save – particularly when you’re young and there are so many things you want to spend money on – but the key to living well is saving early.”

3. Protect your biggest asset – your earning ability

“Life can take unexpected turns,” adds Ferreira. “You may one day find yourself unable to work due to disability or illness, for example, but you will still have your bills to pay. Taking out income protection is crucial to ensure you remain financially empowered no matter what happens. Also consider life and/or disability cover.

4. Look after your health

If you don’t have adequate medical aid, the costs of medical treatment may be extremely difficult to cover. By becoming a member of a medical aid at a young and healthy stage, you can avoid late-joiner penalties and waiting periods.

5. Be prepared for emergencies

Always have an emergency fund as buffer. This should be the equivalent of at least three months’ salary. It will cover unforeseen expenses that may arise as a result of an emergency or crisis.

6. Lastly, plan for your short-term goals – so that you can afford that overseas holiday.

“These considerations may seem a bit overwhelming and even daunting when you’re in the early years of adulthood,” says Derick. “That’s why it’s a good idea to consult a financial adviser to help you develop a financial plan and make saving a natural and automatic part of living a great life where you can afford and enjoy the things that’s important to you. Always remember to look at the bigger picture and what you stand to gain in the future.”

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