“Try to save something while your salary is small; it’s impossible to save after you begin to earn more.” (Jack Benny)
Finding your first job and earning your first paycheck are significant steps. That money represents independence, and the opportunity to create your own future.
However, it can also be a confusing time. There’s a lot to consider, and making the most of your first salary requires understanding some important fundamentals.
1. Mastering the “net” reality
Most young professionals in a new job will be quoted a gross salary: their “cost to company”. It’s important to understand what that means, and why the amount that lands in your bank account will look very different.
“Cost to company” refers to the amount that your employer budgets for you. But there’s a lot that happens in between that amount and the salary that you end up taking home.
First of all, PAYE (Pay As You Earn) tax will have to be deducted as well as the mandatory deduction for the Unemployment Insurance Fund (UIF). If your employer also includes medical aid premiums, insurance and retirement funding, your adjusted income might be anywhere between 25% and 45% lower than your cost to company.
For this reason, before you commit to any long-term spending like a lease or vehicle instalments, wait for your first payslip. Find out what your net salary figure is going to be so that you can use that for your budgeting. Getting the most out of your money starts with ensuring your fixed costs (rent, insurance, transport) do not exceed 50% of your take-home pay. This “margin” is what allows for future wealth.
2. Capturing an instant investment gain
If your employer offers a retirement fund with any kind of added employer contribution, you have access to one of the few “free lunches” in finance.
Some employers might “match” whatever you contribute. For example, if you agree to pay 5% of your salary into your retirement fund, your employer will add an equivalent amount. That means you have achieved an immediate 100% return on your investment with no effort. That would be impossible to find anywhere else.
Many young professionals forego this instant benefit in favour of higher take-home pay. While this is understandable given cost-of-living pressures, the long-term benefit of taking this “free” money from your employer can’t be emphasised enough. There is simply no better investment return available anywhere. By taking it, you are making a huge difference to your future wealth.
3. The TFSA: South Africa’s secret weapon
South Africa’s Tax-Free Savings Accounts (TFSAs) are a powerful tool for long-term wealth optimisation. In these accounts, the gains on your money are never taxed. This is very different from “standard” investments, where income, dividends and ultimately capital gains all attract tax sooner or later.
For this reason, you should set up contributions to a TFSA straight away, since this is an incredibly powerful way to build your wealth. The longer you allow these tax-free gains to compound, the more you will benefit.
A word of warning: never waste your TFSA allowance by investing it in a bank deposit. The interest you earn on a bank deposit is tax-free up to R23,800, so using a TFSA for a bank deposit is superfluous. What’s more, because the lifetime limit in these accounts is precious, you should fill it with high-growth assets like shares that deliver the best long-term growth.
4. Building the “liquidity buffer”
You never want unforeseen costs such as medical co-payments or sudden vehicle repairs to derail your financial plan. That’s why it’s important to have a cash buffer that will protect you from having to take out high-interest debt in the case of an emergency.
Every financial plan should include a high-interest, liquid “emergency savings” account to protect you from a sudden major expense. Aim to save a “starter” emergency fund of R10,000 to R15,000 as quickly as possible. This isn’t just a safety net – it’s “psychological capital” that allows you to make career and life decisions from a position of strength rather than desperation.
5. Don’t neglect yourself
The most important thing you can do with your first paycheck is to begin purchasing your future financial independence. That means investing responsibly.
But that shouldn’t mean neglecting your own enjoyment of life. The real value of having money is, after all, the freedom it gives you to make your own choices.
So, reward yourself with a personal purchase that won’t break the bank, something that will make you feel that you have “arrived”. After all, you’ve earned it!
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Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
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