Earning an income for the first time can be a heady experience: the thrill of having your own money, being able to have the final say on how you spend it and the security of not relying on someone else.

These are all great things, but if you ask a 50-year-old what they wish they had done differently, chances are they will say they would have managed their money differently from the time they got their first paycheque.

There were gasps across the country when FNB revealed last year that average middle-income earners were spending up to 80% of their salary within five days of being paid. This meant that most of these earners were forced to eke out the remaining 25 days of the month on just 20% of their monthly income.

Here are five money tips that can set you on the path to financial freedom: 

1. Start with a budget

One of the first money rules you should learn is the value of a budget. Charnel Collins, the CEO of National Debt Advisors, says budgeting helps you know exactly where all your money is going, and also how to save effectively and leave enough money for unexpected expenses and emergencies.

Collins refers to the 50/30/20 budgeting rule as a savings strategy and an easy guideline for planning your budget.

“How it works is that 50% of your net income goes to needs like rent, groceries and utilities; 30% to wants such as hobbies, holidays and dining out; and 20% to financial goals such as savings and debt payments. Understanding your priorities and budgeting according to those needs is what makes this budgeting rule so efficient.”

Collins adds that once you start earning a salary, you are likely to find companies offering you credit, which can be very tempting. “While a well-managed credit card can be a useful financial tool, without the proper financial knowledge it can quickly get out of control,” she cautions. 

2. Remember that your money needs to last as long as you do

Adriaan Pask, the chief investment officer of PSG Wealth, points out that advances in medicine, technology and overall quality of life have resulted in the average person’s lifespan increasing by about three years for every 10 years that pass.

The World Economic Forum expects a massive shortfall ($80-trillion) in retirement funding among retirees globally by 2025 because many are underestimating how long they will live and how much money they will really need in retirement.

When you do not add to or grow your savings, your required savings rate doubles every decade. “A person who retires at age 60 has a life expectancy of 85 years, has a required real return of 5% and should save 12.50% from the age of 20, but that rate roughly doubles every 10 years. The longer you delay, the steeper the climb. Start early to lessen the load,” Pask advises. 

3. Fight the inflation monster

Protecting your savings against inflation is crucial. Assuming South African long-term inflation averages about 6% a year, you in essence start every year with minus 6% and need to ensure that you invest in such a way that you can recover that 6% and then grow the real value of your savings on top of that. For example, if a balanced portfolio offers a return of 11% a year, the real growth only equates to about 5% a year.

Pask warns that not all asset classes are engineered to protect savings against inflation. “For example, cash is a great way to cater for short-term income needs but is the weakest guard against inflation.

“A portfolio that consists solely of cash is all but guaranteed to underperform inflation after fees and taxes. As a stable asset class, it may provide short-term comfort, but over the long term, the opportunity cost is significant,” he says. 

4. Note that compound interest is your greatest ally

Over the short term it may not seem that the difference between seven, eight, 11 or 15% is all that much, but these differences grow and compound over time. By way of example, a R100 cash investment that grows at 7% would grow to R387 over 20 years, whereas an equity investment growing at 15% would be worth R1,637. 

5. Avoid lifestyle creep

Victoria Reuvers, the managing director of Morningstar Investment Management SA, says it’s important to watch out for “lifestyle creep”. In a nutshell, this is where you spend more money as your income increases. “It’s not strictly a bad thing: you work hard, and when you are rewarded with a raise, you might be able to afford a bigger apartment closer to work or a house in an area [close to good schools],” she says.

However, the more you spend, the less money you’ll have available to save. “By staying conservative about spending and not taking on too much debt, you’re not only able to save more while you’re working, but you’ll also be creating a less expensive lifestyle that doesn’t require as much money to fund during retirement,” she advises. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.