Are you an Early Earner and just landed your first job? Exciting isn’t it!? But that excitement for financial freedom can often be quickly replaced by the hard reality of the cost of living. So, anyone attempting to talk to you about stuff like saving for retirement may seem completely out of touch with your world.
But you don’t have to put a lot away – it just needs to be something. And a savvy approach to spending and saving from the get-go can make an incredible difference to your financial wellbeing later on.
Here are 5 easy tips for you to begin your financial journey to success – today.
1. Start with protecting your income before anything else: When you insure your income, you insure your today and your future. Your income provides for all your necessities (like rent, medical aid and car insurance), as well as life’s luxuries like that new pair of sneakers or weekend away. That’s why everyone who earns an income needs income protection. Here are some of the reasons why protecting your income from the first day you start earning is so important:
Your entire career is ahead of you and your future earning potential is at its highest: A 22 year old earning just R15 000 a month, for example, will earn R38.8 million over their working career1. It’s important to point out that you’re not insuring R15 000 – you’re insuring R38.8 million.
You’re at your healthiest: Lock in your good health by getting income protection before you experience an injury or illness that may lead to an exclusion or loading in the future.
Income protection is at its most affordable when you’re young: Income protection costs less than a daily cappuccino for an individual in their 20’s.
Your risk of a temporary injury or illness is at its highest: A 22-year old has a staggering 96% chance of a temporary illness or injury that will stop them from working for more than two weeks during their career2. Many Early Earners think that their sick leave or Group cover will get them through any time off work. When in reality, most Group schemes have a waiting period of 3 months or more. Considering almost 90% of the claims FMI paid in 2018 were less than 90 days, the average employee who thinks they’re fully protected would not qualify for a claim 9 out of 10 times on a typical Group scheme. What’s more, FMI’s claim stats show that an individual is three times more likely to claim again after their first claim. So, while sick leave may help you the first time, you might not have enough left the second or the third. It’s not a question of if… it’s a question of when.
2. Save as early as possible for retirement: The earlier an individual starts saving, the significantly better off they’ll be financially in the future because of the simple power of compound interest. Take the following example: If you opened a Retirement Annuity at the age of 22 and put away just R100 every month into that Retirement Annuity, you will accumulate just over R2.5 million by the age of 70. And if you delay this by only 10 years and start saving at the age of 32, your investment will reduce by a massive R1.8 million3. This simple demonstration plus the fact that you can take out a simple tax-free RA means it won’t cost you anything in the long run.
3. Pay yourself first: Open a savings or investment account and put a percentage of your salary away every month, no matter how small. Build a freedom fund for specific goals like that overseas holiday or a deposit on a new car.
4. Get the insurance you need: Medical aid and car insurance aren’t luxuries. They’re necessities. A financial adviser can help you choose the right options to suit their pocket.
5. Spend less than you earn: If you’re not managing to stay on top of your monthly expenses, the choice is quite simple - you either have to earn more or spend less. And if you can’t earn more, it’s a matter of reprioritising so you don’t get into debt. Whilst it may be tempting to swipe that new credit card, servicing exorbitant interest rates will make life much more stressful later on. One easy way to avoid the debt trap is to track your spending with a mobile budget app.
If you don’t have a financial adviser, contact FMI on 086 010 1119 and we’ll put you in touch with one.
1FMI Future Income Calculator. Based on 6.5% nominal growth and retirement age of 65.
2FMI Risk Stats. Retirement age of 65. Female, non-smoker.
36% RA contribution increases and assumed RA growth rate of 10%.