Investing your first pay cheque

Hlumelo asks: This is my first month of work and I would like some advice on how and where to save money.

My monthly expenses come to R4 700 a month and I have R5 000 left at the end of the month. Apart from keeping my money in the bank, which doesn’t generate any interest, which other methods can I use to save?

Maya replies: It’s really fantastic that you’re making an effort to save right from your first pay cheque.

The earlier you start saving, the more time your money has to grow. You need to save as much as possible now because it becomes more difficult to find the extra cash when you start taking on financial commitments like a house and family.

To give you an idea of the boost you are giving to your finances, if you saved R5 000 for five years (R300 000) and then stopped, leaving the money to grow for a further 20 years, you would have saved about R2,8-million, assuming a 10% return a year.

Adjusting for inflation, that would be worth about R922 000 in today’s value, five times your current annual salary — and that’s from just five years of saving.

Tax advantage
The starting point is to get the taxman to add to your savings. You do not mention whether or not you have a company pension fund. If you do, ask your company to increase your contributions to the maximum.

From March next year the maximum that you will be able to invest in a retirement fund tax-free increases to 22,5% of your salary. If your company does not have an option to increase to that level, then take out a retirement annuity.

Consider going with unit-trust retirement annuities which are more flexible and do not have any penalties if you stop contributing.

Unit-trust companies that offer direct RA’s include Investec, Coronation and Allan Gray. Also look at an RA by financial company 10X — I will be writing about this later this week.

Future earnings
In your email you did not mention whether you have life cover. Find out if your company has you covered. If not, look into taking out insurance.

While you may not have any dependents, if you are disabled or unable to work you will not be able to earn an income. At your age this is relatively inexpensive. Go to websites like www.1lifedirect.co.za or www.frank.net to get quotes on disability and income protection.

Goals
Once you are taking full advantage of your tax-free savings your retirement savings will be taken care of. Now look at what goals you have for the short and medium term.

Do you have emergency savings? Do you want to save for a deposit on a home? Do you want to start your own business one day? You mention that you have a policy that will mature in 10 years time — include that when you are working on your goals.

Most of the banks’ websites offer a savings calculator (look under “tools” — “calculators”) to work out how much your savings will give you at the end of the period. When calculating stock market (equity) returns, work on 10% a year — which is fairly realistic for a five year or longer period.

Emergencies
You are correct that your bank account is a bad place to save, but you do need to have some emergency savings that are easily accessible. Start putting R1 000 a month away into a savings account until you have three months of your bills covered. Speak to your bank about a call account or money-market account that offers a good rate of interest on lower amounts. I know Capitec and Nedbank both offer good rates from relatively low balances and also look into unit-trust money-market accounts — but check whether there are any upfront fees first.

Short-term goals
If you have a short-term goal over the next two to three years, you can also save into the same account as your emergency fund if you want to keep it simple, or you can invest in the SA Retail Bond which offers a very good rate of interest for a two-year investment.

Medium-term goal
For a goal that is five years or longer you can invest in the stock market (equities) via unit trusts or exchange-traded funds.

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