I recently had a chat with one of my clients, a young pharmacist who has been working for just over a year. He was asking me a variety of financial questions, all in an effort to determine how he could make the most with his salary so that one day he could be a wealthy man able to provide a wonderful life for his parents, wife and kids. The conversation I had with him was an eye-opener as I realized that there are many more young working people who feel the same way he does. Hence, this article – a financial guide for all the young individuals out there who have recently joined the South African workforce.
1) Draw up a Budget
Not having a budget is like opening up a cookbook that only shows the ingredients and not the quantity of each ingredient. It may be possible to cook something up, but it won’t be the best meal the chef ever made. It’s important to know the quantity of each ingredient, and it’s the same in finance; it’s essential to know the amount of each expense. So whether an individual earns R15,000 per month or R50,000 per month, in order to grow one’s wealth to its maximum potential, it is crucial to draw up a budget. And, after a month goes by, compare the actual expenses with the budgeted expenses and make adjustments to the budget. This should be done every month until the budget is at least 80% accurate. Practicing this will help you develop an approach of healthy spending because you will be very aware of where your money is going. In addition, the budget will be realistic, so its information can be used to make decisions that will lead to optimal money management: It will help a person to know exactly how quickly debt can be paid off, so interest can be saved. It will help someone know whether a property investment can be made and whether bond instalments will be affordable or not. And, most importantly, it will help cut costs. Ultimately, it will help you have an earlier and wealthier retirement.
2) Prepare to Own your First Property
Saving up enough to purchase that first property will take both planning and time. Below are four tips to assist young individuals own their first property:
• A unit trust investment or a money market account is the best way to start saving. To make the right choices, it’s best to meet with a financial adviser. He or she can provide advice on how much the initial costs will be for a certain property and how to best invest money in order to reach the target amount in as little time as possible.
• Visit each of the big four South African banks and find out the bond amount you will be approved for as well as the interest rate. It’s crucial to get the lowest possible interest rate.
• Tell the bank that you want a 30-year bond. Taking out a 30 year bond is beneficial for several reasons: Firstly, the extra interest for the longer term is not a real problem. The important thing is that the property will be increasing in value and the benefits of owning the property will outweigh the extra interest paid over 30 years. Secondly, the bond instalments will be smaller and it is more likely the bank will not require a deposit, so the property can be acquired much sooner! Thirdly, taking this approach will position the individual for the purchase of a second property much sooner.
• I assist my clients by arranging discounts on attorney fees when they purchase a property. So before purchasing a property, have a chat with your financial adviser and ask him to assist.
3) Take out Life Cover, Disability Cover and Income Protection
Insurance is an expense. But, it is a necessary one because it provides us with security and certainty that, should the worst happen, financial disaster will not follow. Banks often require individuals to have life and disability cover in place when they take out a bond to buy a property, so it is wise to get these policies in preparation for that event.
Individuals study for about 20 years to develop the skills and abilities which now allow them to earn an income for the rest of their lives, or at least until they retire. That’s a tremendous amount of income over the next 40 plus years. If an individual is unable to earn that income due to health or disability reasons, it would be a catastrophe, so it is crucial to protect that income.
One should not delay in this matter. Taking a risk here brings no benefit whatsoever. With insurance, the younger the person and the healthier the person, the cheaper the insurance. So, the sooner a person takes it out, the cheaper it is over the course of a lifetime. The bigger risk of delaying is if a person develops a health issue. Then, the cost of the insurance can increase substantially, or, even worse, the insurance company can decline the coverage altogether. Suddenly, then, acquiring either needed insurance or desired property becomes impossible.
4) Contribute to a Retirement Annuity (RA)
I understand that many young people are hesitant to make such a big commitment. My advice is simple – do not hesitate. With the retirement reforms that became effective 1st March 2016, RAs are even more advantageous than previously. The tax benefits make them an extremely lucrative investment vehicle, and the earlier one starts, the better, because of the amazing benefits of compound interest. I reckon you get started as soon as possible.
The above info is a limited guideline to get young working people on the right path to financial freedom. There is still so much more that young individuals need to know, but that’s all for today, this article is long enough.