Titus asks: My son has just started working. He is still single with no dependents. What investments should be consider?
Maya replies: When you receive your first paycheque, you just want to go out and buy all those things you were dreaming about when studying — a car, new clothes and the latest cellphone.
To finally have cash to burn is a fantastic feeling, so it is often hard to convince someone to start a savings plan, but hopefully your son will listen to your advice.
A great motivator is to set goals — saving for a deposit on his first home or having saved R1-million within the next 10 to 15 years (see related articles).
Tax-free saving
Your son needs to make sure he is taking full advantage of tax-free saving through his company pension/provident fund.
He should opt for the maximum possible deduction. If he saves 15% of his salary from his first pay cheque and never cashes his pension in when changing jobs, he will never have to worry about his retirement (see related articles).
If his company does not provide a retirement fund he should consider a retirement annuity. Unit trust retirement annuities through companies like Allan Gray, Coronation and Investec are low cost and very flexible.
Discretionary savings
Your son should then work out a realistic budget of what it costs him to live each month, and then he should save the rest by setting up a debit order that goes off on the day he receives his salary. What is left in his account is his to spend.
This money will provide for the dreams and goals that he wants to achieve.
These single years, before he starts a family and buys a house, are the best opportunity for him to save as much as possible. This will provide him with a very strong financial foundation.
He should split his discretionary savings into two elements — emergency saving and long-term investing.
- Emergency funds: Financial experts recommend that you have at least three months’ emergency savings in a money market account that you can draw on in an emergency.
- Long-term investing: For long-term savings of more than five years, he should invest in a unit trust or exchange-traded fund (see related articles). If he invests directly with quality companies there would be no upfront fees.
Risk cover
One thing your son also needs to consider is risk cover in case something happens and he is unable to earn an income. As he has no dependants he does not necessarily need life cover, but he does need to have critical illness and disability cover. The biggest risk a young person faces is not being able to earn an income for the rest of his life. At this age premiums are relatively low but the benefit is invaluable should he ever need it.
The gift of advice
Whenever I interview someone who has created significant wealth through savings, they all talk about the lessons they learnt from their parents, who impressed upon them the importance of saving from day one. After his education, this is possibly the greatest gift you could give him.
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