You’ve just qualified as a young doctor, lawyer, accountant or other professional. Starting off in the world of work is exciting, but it can also be scary – you’re on your own now and need to make some important decisions, especially financial ones.
Bev van Nijkerk, segment specialist for Sanlam Young Professional Market, provides some tips on making the choices that will ensure a good start on the road to achieving financial success.
Accept who you are
You are the Y-generation, and you think differently to your parents and the generations before them. The world is a different place to when they were young, so what worked for them financially, may not work for you. You will have to work out your own strategies to ensure that you are financially ready for any curveballs life might throw at you.
Realise that you are the ‘sandwich generation’
You won’t only have to make provision for your own retirement, but will in all likelihood also have to look after your parents, who will be living longer than their parents did. As tax expert Prof Matthew Lester says: “Don’t expect to inherit from your parents – you will be inheriting your parents.” And make sure you check out the in-laws well, since you may be inheriting them too.
Understand that you’ll fall into a high tax bracket
With your qualifications, you are likely to be in a top income bracket. You’ll therefore be paying a lot of tax. Find out what your tax table looks like, and how much will be deducted each month.
Draw up a monthly budget
This is common sense, but not many people actually do it. Your budget is not a judgement, it is just telling you where your money is going. If you have a credit card, remember that your spending limit is not a target – the money doesn’t belong to you and you’ll have to repay it, with substantial interest. Also check your bank costs and make sure you’re not paying too much.
Save up for those big-ticket items
Everyone knows they need to save, but we are living in an era of instant gratification, and it’s very tempting to buy that fancy car you’ve been eyeing the moment you get your first pay check. It’s crucial to draw up a short-, medium- and long-term savings plan and stick to it – if you do, you will reach financial independence quicker than you think.
Set money aside for emergencies
Life’s little surprises happen, and it is advisable to have some money saved up – in an accessible money-market account, for example – to prevent you having to borrow money when they do occur. A good figure to consider is three to six months’ salary. But remember, an emergency is something truly devastating, such as losing your job – needing money for a night on the town is not an emergency!
Start saving for retirement from day one of work
This is probably the last thing on your financial radar, but it really is important. There are relatively painless ways to handle your future retirement, but it means starting young. The later you leave it, the more you’ll have to pay each month to get a decent pension when you retire. The main factors here are time and compounding, where the interest on your investment helps it to grow at an accelerated rate over time. Compounding has been called the ‘ninth wonder of the world’ due to its powerful effect on investment growth.
Don’t (ever) cash in your pension if you change jobs
As a member of the Y-generation, you are likely to change jobs up to 10 times throughout your career. For this reason, you should preferably have your own retirement annuity (RA) which will be unaffected should you change jobs. You should also never opt out of a company pension fund, but when you change jobs, this money should be preserved in a provident fund rather than spent.
Protect your ability to earn an income
This is your biggest asset. What will happen if you become disabled at the age of 25? There are various types of insurance which can be used to cover this and other uncontrollable risks, such as sickness, injury, incapacity and even death. If you have no dependents, you probably don’t need to take out life cover at this stage, but a package containing income protection, and cover for disability and dread disease can cushion the impact of an unforeseen event affecting your ability to work.
Form a relationship with a financial adviser
The world of finance and investments is very complex these days, and a professional financial adviser will have access to information you won’t have (not even on the internet). For example, there are over 1 000 unit trusts in South Africa today – how will you determine which one to choose? Make sure you choose an adviser who understands your needs and goals, and who can walk a long road with you to make sure you achieve your dreams.
Read, read, read
You don’t have to become an expert, but educate yourself about the world of business, finance and investments. Understand how the markets work, and the financial products you have bought. Don’t buy anything without doing your own research first.
Draw up a will
Again, this is likely to be furthest from your mind when you are in your twenties. But if do you happen to die, it can become very messy for your family if you die intestate. Even if you have very few assets, wrapping up your estate can become very complicated if you don’t have a will and an executor.
As a young professional, you have one very powerful advantage when it comes to securing your financial future – your youth. “Make it work for you while you are starting out. Although these tips may seem daunting, if you follow them, you’ll be setting up an important financial roadmap which will benefit you for many years to come,” says van Nijkerk.
