”Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”
You have just finished your studies and have taken up your first job. You are entering the adult world of earning a salary. It is an exciting time with lots of decisions on how you should spend your money. If you can learn to manage your money while you are young, you will grow old and still have money.
Questions you might have:
- Should you buy or rent accommodation?
- What about the fancy German car you always dream about?
- Designer clothes, shoes or jewellery?
- An expensive cell phone or laptop?
- A big-screen TV with DSTV?
- Pay off your credit card or student loan?
The person who doesn’t know where his next dollar is coming from usually doesn’t know where his last dollar went. Unknown
Before you sign up for your first job, look out for the following add-ons that might mean extra money in your pocket every month.
- Does the job include retirement & pension fund contributions?
- Does it offer medical aid?
- Is there a gym membership at a reduced rate with medical support?
- Do they offer a travel allowance?
- Do they offer a house allowance?
- Do they offer a car allowance?
What is the difference between gross and nett income?
Gross pay is what you make before any deductions.
Net pay is what’s left after taxes, health benefits and other deductions are taken out of your check. Knowing the difference will allow you to develop a realistic budget based on your take-home pay.
The word “budget” has a negative feel to it for many people – but budgeting has the potential to help to reach your dreams and goals. Without a budget, you will quickly spend your salary within the first week of the month and have nothing to show. Money goes in three directions: fixed costs, financial goals and flexible spending. A simple way to manage your money is the 50/30/20 % principle.
- 50% – fixed costs (bond payment, municipal bill, medical aid, insurance)
- 30% – flexible spending (groceries, travelling, eating out, shopping, hobbies and entertainment.)
- 20% – financial goals (savings, paying off loans, credit cards, retirement funds)
The 50/30/20% principle is calculated on your “take-home pay/ net pay, ” meaning tax has already been deducted from this amount.
Example of Fixed costs – 50%
- Accommodation: 20%
- Car: 10%
- Insurance: house/car
- Utilities: water, electricity
- Cell phone account
- Telephone account
- Gym membership
- Medical aid
Example of Financial goals – 20%
- Credit card debt repayment: 5%
- Savings: short-term: 5%
- Savings retirement: 10%
- Emergency fund
Example of Flexible spending – 30%
- Eating out
- Car maintenance
- Parking & traffic tickets
- Salon treatments
Record your expenses
The first step in saving money is to know how much you are spending. For one month, keep a record of everything you spend. That means every coffee, every newspaper and every break-time snack you purchase for the entire month. Once you have your data, organise these numbers by category – petrol, groceries, mortgage, etc. – and get the total amount for each. Draw up a budget.
Now that you have a good idea of what you spend in a month, you can build a budget to plan your spending, limit over-spending and make sure that you put money away for a rainy day.
Note on buying cars:
Buying a car is a significant expense. Unfortunately, we have been duped into spending our hard-earned cash on new expensive cars for way too long. In South Africa, between 5000-7000 cars are repossessed monthly because of non-payment. If you try using a car as a status symbol to show the world you are successful, you will probably never be rich.
You should never spend more than 10% of your salary on a car. Ensure you can afford the model’s petrol, maintenance and insurance before you buy a car. According to the AA, 65 and 70% of the estimated 12 million vehicles on South African roads are uninsured, which is growing annually. Choose a second-hand car if you don’t have money to buy a new car with cash. If you cannot afford a car, make use of public transport.
Note on buying a house:
You should never buy a house that costs more than 2 x your yearly gross income. That means if you earn R 300 000 per year, you should buy a house/townhouse in the R 600 000 price range. You should use a 15-year loan period. Remember that you still have to pay house insurance and property tax and maintain the house.
You might need to rent accommodation if you can’t afford to buy your property. To keep costs down, you can share with a roommate. However, you will need more bedrooms if you are married or have kids. You might also be charged extra if you have pets. To calculate how much to spend on rented accommodation, landlords usually require you to earn three times the monthly rent. It means 30% of your nett income. So if you make R 9000 per month, you should not pay more than R 3000/month for accommodation.
Difference between needs and wants:
A need will cause significant inconvenience if you stop that, like your electricity bill, prescription medication and car payment. A want causes minimal inconvenience if you don’t spend money on it like DSTV, entertainment and convenient foods. Water is a need to stay alive; Coke is a want.
Never budget more than 30% of your budget on wants. Wants to fall under flexible spending. It is a good idea to divide flexible spending into needs and wants. For example, bread is a need, and “Oreo cookies” is a want. Both fall under groceries.
“The man who never has money enough to pay his debts has too much of something else.”
-James Lendall Basford
Spend 20% of your net pay on paying off debt and saving money. You should pay off the total amount you owe on your monthly credit card. Never accumulate debt on your credit card because it is the most expensive money you can borrow. It is called a credit card, not a debit card. It should always have a positive credit balance.
You are in trouble if you are already buying monthly groceries on a budget plan on your credit card. The debt will accumulate faster than you can pay it off. Draw up a budget and stick to that until it is completely paid off.
Student loans & bursaries
Many students never learnt to manage money responsibly. Tempted by freedom and peer pressure, they often spend their study money on new designer clothes, jewellery, a Play-station / DSTV and a big screen TV. All the money is wasted when the bills arrive from the university or college.
It is wise to open a separate account for the bursary or study money. Some banks give you the option of three linked accounts in one. Put the money for books and lectures in a separate fund, and only use it for that. Have a different version for your daily living expenses.