As a recent graduate earning your first income, starting your financial planning journey the right way is critical to your future financial success.
If you’re a graduate starting out your career, consider the following financial tips:
1. Banking and budgeting
The transition from student to a full-time employee may require that you review the type of bank account you use to manage your affairs, so do your online research or visit your bank to establish which account type is most suited to your needs. Remember, the ongoing responsible management of your various bank accounts is essential to building a good credit history, so set time aside to get your banking affairs in order.
Most South African banks have excellent apps available which allow you to track, monitor, budget and centrally manage your accounts seamlessly, so be sure to use technology to your advantage. Whatever technology you use for budgeting purposes, be sure to get into the habit of tracking your expenditure, managing your cash flow, and ensuring that your expenditure does not exceed your income. Remember, it’s not how much you earn that matters, it’s how much you invest, which leads us to the next point.
2. Saving and investing
There is no quick way to get rich. When it comes to creating sustainable wealth, nothing beats the combination of time and compound interest, so start investing today. Get into the habit of using a portion of your paycheque to save for the future, or at least for some future goal. Ideally, automate your savings so that your premiums run off your bank account on a monthly basis – and be sure to review your level of savings as and when your earnings increase.
The phrase ‘paying yourself first’ is another way of saying ‘invest in yourself’, and the best way to do this is to start saving with your first paycheque. One of the most tax-efficient methods of building wealth as an income earner is to invest through an approved retirement fund, such as through your employer’s pension fund, if this option is available to you, or through an individual retirement annuity on a LISP platform.
That said, it is advisable to establish a workable balance in your investment portfolio that allows you to benefit from the available tax deductions while allowing you access to discretionary funds earmarked for short to medium-term goals.
3. Emergency cash
Prioritise setting up an emergency fund to provide a financial buffer against high-cost, unforeseeable events. Any sizeable, unexpected costs you may be faced with can derail your financial planning and land you in debt. Ideally, target a cash cushion that would be sufficient to cover your living expenses for a period of three months, and keep these funds clearly earmarked for emergency expenditure. The level of your emergency funding should be driven by a combination of factors such as your current living costs, your risk of unemployment, and whether or not you have other income streams, amongst other things.
4. Debt and credit history
If you have a student loan in place, be sure to understand the terms of your contract so that you don’t miss any repayments, as any late payments can affect your credit score going forward. As a young graduate starting out your career, it may be difficult to avoid incurring debt, so our advice is to do so responsibly, to incur only as much debt as is absolutely needed, and to ensure that your debt repayments are affordable going forward.
For instance, if you need to finance a vehicle in order to ensure reliable transport to and from work, don’t fall into the trap of buying too much car for your needs. Car salespeople are trained to up-sell, so do your research first and be absolutely sure what you are looking for and how much you are willing to spend on reliable transport.
While some debt may be necessary, avoid incurring debt to fund lifestyle expenses such as rental, groceries, entertainment or travel, as this debt is not only expensive but also unsustainable going forward. To avoid falling into a debt trap, you need to ensure that you spend less than you earn and that your debt-to-income ratio remains manageable. Remember, the amount of debt that you have and the manner in which you manage it is critical to building a good credit score, so keep a tight check on your debt repayments and the amount of debt you have.
5. Risk protection
At the outset of your career, there may be little need for life cover – especially if you are single and do not have sizeable debt. However, the risks of illness or disability, both of which can impact your ability to earn an income – either temporarily or permanently, should be mitigated using appropriately structured risk products. Although expensive, private medical aid cover should be a priority in your budget and, if affordability is an issue, consider joining a network option that provides good in-hospital cover.
You may also want to consider putting an income protection benefit in place to ensure that your income is protected should you become temporarily or permanently disabled as a result of illness or accident. Income protection cover is a form of disability insurance regulated by the Long-term Insurance Act and can be quite technical, so consider seeking advice from an independent advisor. If your employer provides group risk benefits, find out if your cover includes income protection insurance as this type of cover is generally more cost-effective.
When applying for disability cover, you are likely to be medically underwritten by your insurer – a process that is designed to allow insurers to assess the risks you present to them. It is often therefore advisable to secure disability insurance while you are still relatively young and healthy, keeping in mind that many diseases and illnesses are a function of the ageing process.
6. Financial and legal documentation
Make a concerted effort to organise your filing system so that all-important financial and legal documentation is centrally collated as you may be surprised at how often you will need these documents. These documents include, but are not limited to:
- Official matric certificate and school testimonial;
- Office transcripts from any tertiary institutions you studied through;
- A copy of your degree and/or diploma certificates;
- Details of all awards, scholarships and bursaries you received;
- Your ID and passport;
- Your will, living will and other estate planning documents;
- Student loan contract and statements;
- Tax number;
- Proof of bank account;
- Reference letters;
- Driver’s licence; and
- Utility statements.
Ideally, set up a filing system that works for you, keeping in mind that it is often necessary to keep hard copies of these documents.
If you’re fortunate enough to be gainfully employed, take all steps necessary to ensure that you understand your employment contract and be sure to make full use of the benefits available to you. Your employment contract should set out all details in relation to not only your salary but also commissions, incentives and bonuses, overtime pay, leave (including study and compassionate leave), retrenchment, deductions and group benefits.
Make a point of going through your payslip so that you are clear on what deductions are being made and how much you are being taxed. Importantly, make sure that your employer has duly registered you for tax and make sure that your taxes remain up-to-date with Sars. Use every opportunity offered by your employer to garner more experience, enhance your skillset, and further your qualifications, keeping in mind that while you are young and single it is much easier to commit to furthering your education.
8. Your online profile
Your real curriculum vitae is the cumulation of all your social media profiles and posts, which means that your future earning potential is very much dependent on the online image you present to the world. Whether you’re seeking an internal promotion, looking for external employment opportunities, or hoping to start your own business, establishing and maintaining your online profile is a critical determinant.