HABIT-FORMING FINANCIAL ADVICE
Berno Lategan, Director at FinFive shares his advice on what to do with that first salary so that you can live comfortably after your last.
As sure as the sun rises and sets each day, so is growing up and getting real about what you do with what goes in-and-out of your bank account. You can just about taste the deposit of your first paycheck and the long list of things you plan to do with it. But, what do you really know about the pros and cons of what you can do with that first salary and how starting good habits now will have you a whole heap-of-happy down the line?
Not every job comes with pension or medical aid. Hell, some places barely bother putting coffee in the kitchen. So when your cost-to-company is the whole sum of it, learn a few facts that will make you smarter today – and then some tomorrow!
Make sure you have considered what you will be able to do and how you will be able to live once that last salary has gone into your bank account. And while you are on the road to that day, make sure you are looking after your health at the same time.
It is frightening to know how many South Africans are without medical aid cover. Consider the implications should you be in a serious accident and how you will cope with the costs of adequate hospital care. With the current disarray of state hospitals, you need to be realistic when considering – and ultimately joining – an established, recognised medical aid that will respond to your health requirements – should anything happen to you.
If your employer doesn't cover your pension and your salary is solely yours to coordinate, you are entitled to a 15% tax benefit from your total, non-pensionable income when contributing to a Retirement Annuity Fund (RAF). For example, if you are earning R10 000 per month and allocate ?R1 500 every month to your RAF, you will only be taxed on R8 500.
You should therefore be able to transfer more funds into your RAF annually and – over a 20–30 year period – compound interest is going to put a more realistic kick-back-and-relax smile on your face at retirement age. Furthermore, you are entitled to a further saving when it comes to your medical aid contributions. The tax benefit for medical aid is capped at R720 per month. This means that if you are spending R1 000 on your medical aid every month, R720 of that is tax-free (that's an impressive R8 640 a year!).
Add this to your already-reduced taxable income from your RAF contribution and you will see that your new monthly taxable income goes from R10 000 gross to R7 740. These are attractive benefits that should get you started on the very frank issues surrounding your 65th birthday as well as peace-of-mind regarding your health and wellbeing.
Albert Einstein once said that the most powerful force in the universe is compound interest. By using this to your advantage, you can get a head-start on big things for your future, and because of it, there should be no excuses – ever.
You can't start saving soon enough but it is also never too late. Even if your first pay cheque seems like a distant memory, it's never too late and you are never too old to start planning for retirement.
Convenient and practical
The days of needing to make someone else rich to explain the ins and outs to you are over. Get online and get going. The high profile investment companies will have an online portal you can access from your desk over that morning cuppa.
For example, you can email firstname.lastname@example.org with the subject line "RAF", along with a list of your income stats and what you are looking to invest and before you can say 'Bob's your uncle', you'll have a response from an accredited financial services company that gets you stashing money away that will eventually make you happy that you did.
Your money. Your choices.
These highly trained, registered professionals look after your investment as if it were their own and annual updates, top up facilities and tax refund certificates are yours for the taking.
It's your money. It's your time.
- Debt is not a good look. Get those Nikes, that iPad or the 42inch TV when you've saved for it. Bad habits die hard.
- Careful consideration should be given to biting off more expenses than you can chew. When you're young, buy the demo model Polo rather than the GTi, and rent a flat until you're sure you're ready to bond property.
- Learn to budget. Base your financial choices on your living expenses, rent, fuel and essentials before considering luxuries.
- Once you do start considering luxuries, make sure they are proportionate to your income.
- Your monthly premium on your RAF should be revised annually in accordance with salary increases, annual bonuses and tax refunds. Invest your refund into your RAF for a further tax-deduction and a greater lump sum at age 65.
- If you are a freelancer, calculate your average annual income for each month in the year and determine your RAF deductions from there.
Find a balance. Discipline, patience and responsibility will lead the way to a happier, financially-healthy future.
You don't need to have it all at once so don't commit to an endless debt-cycle. And if you don't over extend your expenses now, there will always be a bit of money at the end of the month – which you're going to need when the pretty blonde from the next office starts checking you out.
This article was published in:
Women's Health - 28 November 2012
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