What should I do when I earn my first salary?

If you have just started your first job, you may be counting the days until your salary hits your bank account.

It’s an exciting step into the adult world, but figuring out how to manage your money can be daunting.

Great outcomes start with small steps, so make smart financial decisions from the get-go.

It isn’t easy to figure out your salary package and pay slip, yet it is the key to understanding your income and any benefits that come with employment. This can help you to make the right financial decisions.

Your pay slip

Your pay slip serves as proof of your employment and your income.

You will need it if you apply for credit, enter a lease agreement to rent your own home, or even apply for a new job.

It also provides valuable information on your benefits and any shortfalls which you may have.

Your pay slip will include some (or all) of the following information:

• Your basic salary (cash component excluding overtime pay and bonuses);
  
  
• Allowances (employer provided housing, phone, travel or entertainment allowances);
  
  
• Gross pay (the amount you earn before deductions);
  
  
• Deductions for tax and any other company benefits provided;
  
  
• Net pay (take-home pay after all deductions);
  
  
• How much leave you have earned;
  
  
• Your income tax number;
  
  
• Your salary level and employee number; and
  
  
• The cost to company (the total salary package including your salary and any other benefits provided before tax). 

Gross pay vs net pay

Understanding the difference between what you earn and what you take home each month will help you budget properly.

Your pay slip will indicate your basic salary, cost-to-company, allowances, gross pay, deductions and then finally your net pay – the amount that is paid into your bank account. Deductions will include:

• Pay As You Earn (PAYE) (tax deducted by your employer to pay over to the South African Revenue Service). To find out how you are taxed read: How do the income tax brackets work and what is my marginal tax rate?
  
  
• Unemployment Insurance Fund (UIF).

If you work more than 24 hours a month, you are obliged to contribute 1% of your salary and your employer contributes another 1% - up to certain maximums – to the Unemployment Insurance Fund. This will entitle you to unemployment, sickness, maternity and other fund benefits.

• Company benefit contributions such as those for a retirement fund or medical scheme.
  
  

Company benefits

Your employer may pay for certain benefits as part of your cost-to-company package. Check your employment contract and your pay slip to find out what benefits you enjoy. They may include:

• Contributions to a pension or provident;
  
  
• Group life cover that will pay out if you die or are disabled and may include funeral and severe illness cover);
  
  
• Medical scheme cover.

Do you need cover?

You may think life insurance is an unnecessary expense when you are young, but disability cover is most valuable when you are young and could potentially lose all your future pay cheques if injury or illness leaves you unable to work for the rest of your life.

If your employer does not provide disability cover or income protection, take out your own cover.

Life insurance taken out when you are young will be very valuable later especially as your family responsibilities change.

Provide for healthcare

Check if your employer contributes on your behalf to a medical scheme and familiarize yourself with the benefits your scheme option provides and how.

Alternatively, your employer may subsidise membership of a primary healthcare plan. Read more: What is a primary healthcare plan?

Remember this does not give you the same protection as a medical scheme and late-joiner penalties apply if you join a scheme after the age of 35.

Healthcare cover is a must to protect against serious illnesses or accidents, which affect people of any age. If your employer does not provide this cover, take out your own.

Start saving early and score

Irrespective of whether you have a company pension or provident fund, you need to be saving for retirement from your first salary to ensure a comfortable old age.

The power of starting early is immense. Let’s look at two investors – Sam who starts investing at 25, and Sam’s Bestie, who only starts 10 years later.  Both are investing till age 65:

	THE POWER OF STARTING TO INVEST EARLY
	Starting age	Number of years they invest	Monthly investment	Total invested till age 65	Value at age 65
Sam	25	40	R1 000	R480 000	R2 734 986
Sam's Bestie	35	30	R1 333	R479 997	R1 337 081
Source: www.smartaboutmoney.co.za

This is based on a real return (after-inflation) of 5% a year. By starting later, Sam’s Bestie loses out on 10 years of growth and even though she pays in a higher amount each month, it’s impossible to make up for the loss of time. At age 65, Sam’s Bestie's savings are worth around R1.3 million, while Sam’s are worth around R2.7 million.

Build good money habits

Many people believe they need to earn a high salary before they start managing their money. This is not true. If you cultivate healthy financial habits from your first salary, no matter what you earn, you may well find yourself better off than higher earners in time. Here are the key principles:

• Build a bullet-proof budget that takes all your needs into account – living expenses, as well as paying off any student debts. Don’t forget to budget for some fun. Treat yourself but without derailing your plans for your money.

• Set up and start saving towards an emergency fund so you don’t need to incur debt or dip into your investments if there’s a crisis.
  
  
• Earning a regular income will make you eligible for credit. Use some credit – a credit card or store account - wisely so that you can build your credit score for when you need to finance a car or a house. Spend only within your budget and pay off the full balance at the end of each month or within the interest-free period. That way you will never incur costly interest.
  
  
• Avoid the debt trap, particularly when it comes to buying a new car or furnishing your first home. Build yourself up slowly, buying with cash as you can afford. In the long run you will get more for your money.
  
  
• If you need, and can afford, a car, start small and wait until you are earning well before you upgrade. Don’t fall into the trap of buying a car with a balloon payment simply because it seems affordable.
  
  
• Set financial goals. In the short to medium term, you may want to save up for furniture, a deposit on your own property or a car. Longer term, you need to plan for holidays and your retirement.
  
  
• Invest in knowledge around money and investing.
  
  
• Start a side hustle – it’s always wise to have more than one source of income.

A delicate balancing act

When you start in a low-paying job it is hard to have enough money to do it all, especially if you need to help family. Remember your income will grow and saving can help you can get what you want if you are patient.

If your first attempts to stick to a budget fail, revise it and try again. Start small with your goals and celebrate when you reach them.