A budget for a job starter
Follow six ordinary South Africans as they take up the Absa/City Press Money Makeover Challenge and undergo a money makeover boot camp over the next six months. Each candidate has been allocated their own Absa financial adviser. The candidates will be required to complete certain financial tasks and stick to the budgets set out for them. Personal finance expert Maya Fisher-French shares their stories
Before you spend your first pay cheque on luxuries, make sure you draw up a budget
Once you graduate and start working, it may feel like you have won the lotto. You go from struggling student to having your first pay cheque. This novel feeling of wealth is often short-lived as you experience the true cost of living and the temptation to take up the many credit offerings from store cards, credit cards and personal loans. Between the offerings, you could access around three times your monthly salary in credit. That can lead to a sense of “why wait when I can have it all now”.
Unfortunately, it is not long before you realise the true cost of credit and find that your monthly cash flow is going to repay loans taken for things you may not even remember buying.
The most important step to take before you receive your first pay cheque is to have a budget.
“When doing any type of budget, you need to have goals in mind and you need to know clearly what your minimum expenses will be,” said Zihle’s Absa adviser Anton Battiss.
He added that a budget should be categorised into necessary or fixed expenses, luxury expenses and savings (future or short-term) and emergencies.
A good rule of thumb is to divide your budget based on a 60/20/20 rule: 60% of your income goes towards necessities, 20% towards financial goals and 20% towards luxuries.
NECESSITIES VS WANTS
Necessary or fixed expenses are usually non-negotiable and could include rent, transport and groceries. These expenses are dependent on the person’s own circumstances, such as whether they live on their own or whether they share accommodation with friends or family, but they need to be prioritised and strictly adhered to.
If the job starter is expected to support family, this should be included in the monthly budget as a necessity rather than being paid on an ad hoc basis.
“A young person needs to ensure that their non-negotiable expenses are covered in their budget before they start budgeting for luxuries,” said Battiss.
He explained that luxuries could include things such as cellphone contracts, entertainment, subscriptions for streaming services and clothing accounts. These things are nice to have, but not necessities.
While something like a cellphone may be a necessity, it is not necessary to have the most expensive one. The latest iPhone or Samsung Galaxy quickly moves from a necessity to a luxury.
Other luxuries or wants include things such as going out for dinner or drinks.
While this is important for a balanced life, a strict budget should be implemented to ensure other more important expenses are not affected by this.
SAVINGS
Before a cent goes towards luxuries, a young person should ensure that they set aside money for savings and emergencies. Emergencies are usually the biggest cause of people taking up expensive, short-term debt. While the rule of thumb is to have three months of expenses saved, that takes a long-time to achieve.
A good starting point is to save at least R10 000 in a savings account linked to your bank account. These funds should not be kept in your transactional account and should only be used for emergencies.
When it comes to savings goals, a young job starter might have goals of travelling or buying a car or property.
“You need to be realistic about the costs of these goals and ensure that you are able to put enough money away on a monthly basis to reach this goal, without negatively affecting your fixed expenses,” says Battiss.
He warns that another longer-term savings goal neglected by many is retirement savings. Make sure you are contributing to your employer’s retirement fund or, if they do not have a fund, consider your own retirement annuity.
After the first month or two, the job starter should review their budget and their expenses to see whether they are still on track with their budget and check whether they have over-or-under budgeted for anything.
Paid monthly but plan weekly
In most cases where someone finds that their debt levels keep rising, the reason is due to monthly cash flow. They find that, halfway through the month, they have run out of money and start using the credit card to get by.
This is often due to the “wealth” effect of payday, where we go out and splurge on luxuries rather than making sure our necessities are covered. A good strategy for managing your monthly cash flow is to pay for all your necessities on day one.
This includes rent or mortgage, savings, basic non-perishable groceries (for parents this can include nappies for the month), airtime, electricity and water. Then calculate how much you will need each week for groceries and transport and other needs.
Make sure you keep those funds available and track your spending on a weekly basis. Only once you have accounted for all these expenses do you know what you have left for the luxuries.
A young person needs to ensure that their non-negotiable expenses are covered in their budget before they start spending on luxuries
Always consider your options before taking on debt
For medical technician Zihle, the thrill of earning a decent salary was short-lived when her mother passed away. Apart from grieving for her mother, Zihle became financially responsible for her two younger sisters who were still studying.
To get by and meet the costs of her sisters’ education, Zihle took up the many loans on offer. While these loans have allowed Zihle and her middle sister to finish their studies and obtain employment, it has created an ongoing burden on her to repay them.
“I thought I could fix it with time by taking out a small loan at first, but then the debt just got bigger and bigger,” explains Zihle.
If you are faced with a financial crisis, investigate what options are available rather than defaulting to using short-term credit to make ends meet. Zihle’s Absa financial adviser Anton Battiss said that, with better planning, Zihle could have reduced the cost of the loans.
For example, she and her sister could have applied for student loans from the bank. These normally have better interest rates and longer repayment terms.
Given the circumstances of losing their mother, they would have qualified for National Student Financial Aid Scheme bursaries, which could have paid for the studies and provided a stipend. Battiss has recommended that Zihle considers this route for her youngest sister who is finishing matric this year.
Battiss encouraged Zihle to approach the headmistress of her sister’s school to discuss a possible reduction in school fees due to her financial circumstances.
Credit is often seen as a quick fix, but the true cost is felt later and has serious consequences to your other life goals. Before you take out a loan, think about what other solutions may be available.
Find out more about the contestants and their advisers here:
If you really want to get your finances in order, you have to start tracking your spending. If you cannot commit to that, it is unlikely you will be able to reach your goals.
City Press will follow the candidates’ progress on the first and third week of each month, as well as online on the Money Makeover page:
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Absa Enterprise Development assists SMEs with access to business development support, markets access and access to funding based on certain criteria’s being met. For further information on Absa Enterprise Development you can email ed@absa.africa
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