Setting a goal to complete a half marathon can seem daunting if you have never run much before. Planning is easy, but training can be tough. Many will quit in the first week and many more will follow suit over the following month. However, if you persevere, the rewards are great. Achieving a half marathon in three months will seem effortless to most. Success in running and personal financial freedom comes from consistent, sustainable habits over time.
A successful grandfather once advised his grandchildren that when they secure employment, they should request their employer to contribute 15% of their salary towards their pension. He emphasized that this contribution should be sought for any subsequent job throughout their career. According to him, it is a modest amount, but delaying contributions until the age of forty, even with a higher salary, would result in an inability to catch up due to the power of compounding interest.
Let’s consider Judy age twenty five:
She left university with an honours degree (four years), has travelled for a year, and is now starting her first role with a salary of R35,000 per month. If Judy starts with a 15% contribution, this means that, after tax (R4,718) and contributions to the pension fund (R5,250), Judy’s take-home pay is R25,031 per month.
A closer look at Judy’s budget:
- Car & Insurance: R5,500 (Needs)
- Rent & Electricity: R6,600 (Needs)
- Medical Aid: R2,500 (Needs)
- Cell Phone & Internet: R1,800 (Needs)
- Groceries: R4,500 (Needs)
- Streaming Service: R600 (Wants)
- Gym: R500 (Wants)
- Eating Out: R2,000 (Wants)
- Savings – Emergency fund R1,000
- Total Expenses: R25,000
Introducing the 50/30/20 Rule
The 50/30/20 rule is a simple and effective budgeting method that helps you manage your finances by dividing your after-tax income into three categories:
50% for Needs:
This portion covers essential expenses that you can’t live without, like rent or mortgage, electricity, water, groceries, car payments or public transport, insurance (health, auto).
30% for Wants:
This category is for discretionary spending on things that you enjoy but aren’t essential: dining out, movies, concerts, gym, travel, shopping (clothes, gadgets).
20% for Savings and Debt Repayment:
The final portion is dedicated to improving your financial health. This includes an emergency fund, retirement savings, debt repayment, investments.
How do I get going?
- Pension contribution (15%) (R5,250 pm) – promise yourself that you will never touch it until you retire. It’s a financial disaster if you do, as you effectively reset yourself to zero and undo all your hard work.
- Understand your take-home pay (R25,031 pm) and where it’s going.
From here, you enter the world of trade-offs. To see what those trade-offs are, you need to understand where you spend your money. Once you understand this, then you are capable of understanding trade-offs. Remember, every decision is for now. You have to be resilient at this point.
Once you have this in place, you can decide on the following:
- What rental can I afford? For example, I cannot afford R8,000 pm as everyone else is doing. I need to look around the R6,000 pm figure for now.
- What car can I drive? Never buy a new car; it is a disaster financially and means you increase your insurance costs.
- How long does a cell phone last? Try and keep a phone for as long as possible. With phone covers, no one knows what you have anyway.
- Do I need a gym membership? Do I actually use it? Could I go for a run instead?
- Do I need a streaming service right now? Could I use my parents’ subscription?
All businesses want you on a monthly subscription; whether it’s a cellphone contract a streaming contract or a contract for data/storage this is NOT in your best interest. You will have to make all these lifestyle choices. It will be difficult initially, however remember that your salary should increase as your career progresses.
Acknowledge that you probably have unrealistic expectations of yourself as a young person. Life is hard and it takes a bit longer than you think. Be patient and remember, small actions over a long period get you there eventually.
Everyone is hung up about buying a property. Unless you are receiving outside support it is an unrealistic goal for now. But keep an eye on your rental cost. If you pay R10,000 pm in rent, this means that you could service a R1m bond yourself. Let that be a barometer when you should be thinking about buying. But most people will only be able to afford to purchase when they are around 30 – when they are cohabitating or getting married and can share a bond repayment.
If you are living at home, you should start to contribute to household expenses and get used to that cost in your budget. Pay your parents or yourself the rent so that you start to get used to the cash flow when you eventually launch yourself into your own home. If you are lucky enough to not be paying rent at home, then pay the money you would be paying in rent into a savings account and build up a deposit. This gets you used to not having the funds available as discretionary spend.
Resisting Peer Pressure
Trying to keep up with your peers financially at any point in your career is a very poor financial tactic. Do not be drawn into comparing yourself to your peers and what they are driving or where they are living or where they are eating out.
Run your own race and be comfortable with your decisions
This is where resilience will be most needed. Have the pride, patience, and confidence in yourself to see it through. Your goal is ultimately financial freedom. It plays a big part of the equation in becoming fulfilled and ultimately happy.
In Summary:
- When you get a job, contribute 15% into a retirement fund. (The Psychology of Money or Manage Your Money Like a F..ing Grown Up are great reads).
- Understand your take-home pay, after tax and pension contribution.
- Understand how you spend your money. Track it carefully for a while. This then allows you to make better lifestyle decisions that won’t sideline your path to financial freedom.
- Reset your expectations as to when you are going to move or buy a property – be realistic.
- The “beginnings” for anything worthwhile are challenging, but remember it is the small things done over a period of time that will get you over the line.
- Work hard and focus on earning more at work and equally controlling your spending.
- Lastly, and probably the most important – Life is a journey so enjoy the ride. It will be filled with highs and disappointments along the way. Don’t wish it away but rather embrace the challenges. It will make the end destination so much sweeter.
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