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by Tammy Peyper: Financial Services Board
Getting your first pay check is an amazing feeling which is often followed by the overwhelming urge to ‘flash the cash’. Once you start earning, a whole new avenue of temptation opens up with quick and easy access to a variety of credit such as credit cards, overdrafts, store cards, various loan products etc. This easy credit coupled with the need to ‘upgrade’ your lifestyle is often at ends with your new found responsibilities which come with being employed. These responsibilities may include contributing financially to the household, paying rent, taking insurance on items, paying maintenance for children, education costs (and the list goes on).
A danger for many first time workers is that there is no clear plan in place of how you are going to spend your hard-earned income. This often leads to first time workers over-spending and making poor financial choices. To avoid this, you need to have a clear financial plan which will include managing your day to spending right the way through to retirement planning. When you plan you can take control of your financial life and you can avoid additional money problems. There are are two key reasons why 94% of South Africans do not achieve financial independence by retirement:
· They fail to properly plan to meet reach their financial goals
· They spend money on wants and greed instead of spending money on needs.
So what should this plan entail and how can you start making your money work for you from the day you start working for it?
These are some steps you can follow in drafting your financial plan.
So where are you now with regards to your finances? Things to consider when determining your current financial situation include any money problems, your income, your accounts, debts, micro-loans, any savings policies or investments you have and your assets. It is also important to have knowledge about your household member’s employment, health, income, spending habits and priorities for each of your household members. By having a comprehensive picture of the financial demands on your household you will be better informed to determine your financial priorities and make plans for your financial future
Sit down and identify goals which you want your money to achieve for you. You should have short term goals (savings for a holiday, Christmas, furniture etc), medium term goals (such as saving for a car etc), long term (saving for a house, children’s education, retirement etc).
One of the keys to financial independence is making savings and investing a priority as soon as possible for as long as possible. People often ignore the power of compound interest. Let’s look at the scenario below:
Sipho, Thandi, John and Ricardo each invest R100 per month at 8% per year, till they are 60. Each starts at a different age. Sipho is 20 years old when he starts, Thandi is 30, John is 35 and Ricardo is 40 years old when he starts. Look at the blow table to see how much each will get out when they reach 60.
A budget is a written plan which details how you are going to spend your money. A budget lists your income and
all your expenses. The key to a budget is to be
entirely honest with yourself about how you spend your money. A budget will assist you in prioritising how you spend your money.
As a starting point write down all the things you
have to pay and how much you need to pay. These we will refer to as your ‘needs’ and they must always take priority. Needs may include food, shelter, transport, medicine, accounts which must be paid, education, child care, electricity and water. These are items you must pay. Before you decide to take on any debt you must insure that repayments will not influence your ability to cover the costs of your needs.
Once your needs are identified and budgeted for you then can start budgeting for the fun things- those things you want. A ‘want’ is something you can live without or a ‘nice to have’. It is important to identify wants and to work toward them. A want maybe anything from a holiday away to a new smart phone. There is nothing wrong with wanting these things and setting them as rewards for savings is a good way to encourage working hard to ensure you make these wants a reality.
Financial planning may feel overwhelming and is a serious matter if you are serious about achieving your financial objectives. Consider the services of a Certified Financial Planner (CFP) to assist in mapping your financial future. You may contact the Financial Planning Institute 086 1000 FPI (374),
www.fpi.co.za to locate a CFP in your area.
Starting off your working career is exciting and nerve-wracking all at the same time. From your first pay check till your last you will need to ensure that you have a financial plan in place which prioritises what is important to you. Review this plan regularly to ensure you are still on course. Remember the sooner you put your financial plan in place the greater the long-term financial reward.
Written by Tammy Peyper
Manager: Consumer Education
Consumer Education Department
Financial Services Board
(+27) 12 367 7148