Help your kids balance their first pay cheque thrills with their bills
By Jaco Prinsloo
When you’re new to the workforce, you’re probably just trying to make ends meet, but small money decisions made today can have a big impact on your long-term financial future. Parents can play an integral role in guiding their youngsters, new to the workplace, with how to put their first salary to the best use.
Understand your pay cheque
One of the first things a new employee must understand is the difference between the amount they receive in your bank account and the value of all their company benefits. One’s cost to company can include allowances, medical aid premiums and retirement fund contributions, plus your gross salary. After deducting your benefits and taxes, the amount you receive is your take-home pay. Once you receive your first salary the first thought going through your mind is how you’re going to spend it.
After years of dreaming of getting a secure salary, impulsive youngsters might be tempted to hit the shops and start spending. Parents should help their children to draw up a budget. This does not have to be complicated, rather a simple plan to help them manage their money responsibly. You can use spreadsheets, the envelope system or a budgeting app that does the calculating for you. A budget must plan for living expenses like groceries, travel, rent, as well as how much they can afford to save and spend.
We all have the choice between paying off our student or car loans or saving. With the destination in mind; at the end of your financial journey, parents want their children to be debt-free and have sufficient savings. There is no right or wrong answer. Advise your child to start by paying off their loan with the highest interest while building up your emergency fund. Once they are free of student and car loans, and an emergency fund is in place, they can start saving for the future.
In George S. Clason's classic book The Richest Man in Babylon, he shares the secret to becoming rich; pay yourself first. By saving, you are rewarding yourself for a month's hard work, and the sooner you start, the easier it will be to reach your financial goals. Advise your child to start building an emergency fund worth three to six months of living expenses as soon as possible, after which they should start saving for longer term goals. If their employer does not offer a retirement plan, they should set up a retirement annuity fund for themselves. In addition to saving for retirement, they will also receive a tax deduction on retirement fund contributions - a win for their current and future self.
Appoint a financial adviser
Encourage them that just because they aren’t making six figures doesn’t mean that a financial adviser wouldn’t give them the time of day – now is the time to set their financial plan in motion. Getting help from a certified professional will ensure they do an annual financial check-up, just like you would with your health.
They deserve it
And now for the fun part, rewarding themselves for all the early mornings and late nights. After covering living expenses, paying debt and saving for the future, they can spend whatever is left guilt-free. At first, it might just be dinner at a local restaurant, but as their income increases so can the spoils.
One’s first salary does not only represent a reward for years of hard work and sacrifice but also the start of your young adult’s financial journey. By helping them set up a plan to manage their finances, living below their means and saving for their future, you will put your child on the right path to achieve their financial goals.
Jaco Prinsloo is a Certified Financial Planner at Alexander Forbes