Every first-time employee has aspirations and visions as to how they will spend their first month’s salary. Young employees are, however, often disappointed by the actual Rand amount which reaches their bank account – even after they believed they had negotiated a competitive remuneration package.
“The majority of first-time employees are entirely focused on mastering the responsibilities of their new job and look forward to welcoming the receipt of their first salary into their bank accounts.However, many find themselves ill prepared when they realise that the total amount they are actually taking home differs substantially from the amount they assumed they would be getting,” says André Lindeque, consultant at leading wealth and financial advisory firm GTC.
He attributes this to a lack of knowledge about their remuneration structures, regardless of the education or skills level of the new employee.
“While tertiary education institutions may prepare you for your profession, they do not impart much practical advice and information about remuneration structures. One of the biggest concepts that still catches new starters by surprise is the difference between their cost to company (CTC) and net salary.”
CTC is the total remuneration that an organisation pays an employee, of which the salary is just one component.
“The elements included in the CTC may vary from business to business and they could include voluntary deductions such as contributions to a pension, provident fund or retirement annuity, group insurance and medical aid. CTC will include statutory elements such as Pay-as-you-Earn (PAYE) taxation and Standard-Income-Tax-on-Employees (SITE), leave and bonus allocations. These components and the extent of the company’s contributions can vary significantly between organisations and may not always be explained upfront. It is therefore advisable for employees to familiarise themselves with these items and get clarity on what their employer is offering, to avoid unexpected disappointment at the end of the first month,” Lindeque says.
In addition to this, new employees need to be aware of those items that are a feature of all payslips and which will determine their net salary.
“Employees who are new to the workforce seldom appreciate that they will be taxed on their remuneration, regardless of how little they believe they earn. Companies are responsible for deducting Pay-as-you-Earn (PAYE) tax and for making contributions to the Unemployment Insurance Fund (UIF) on behalf of their employees,” adds Lindeque. “Alongside medical aid and retirement fund contributions, these items can make a significant difference to the money employees can expect to register in their bank accounts at the end of each month.”
In order to better understand and structure their earnings optimally from the start, Lindeque advises that new employees study their organisation’s Human Resources (HR) policies and spend as much time as necessary with their HR delegates to ensure that they ask all the relevant questions regarding their understanding of these elements.
“It is crucial that new starters know what to expect on their salary slips or remuneration contracts and that they engage with HR representatives who should be able to clarify or explain those elements which they are uncertain about. If HR do not know the answers, they will be able to direct employees to the experts responsible for the company’s benefits.”
Once employees have clarity on what the company offers, they will have a better idea of what choices they have in structuring their payslip. This includes exercising their option on which retirement savings investment strategy they are pooled in, and the level of their retirement fund contributions.
“Many employees – whether new or not – are either not aware of, or do not pay attention to, the fact that they have a choice over which retirement investment strategy they are pooled in. Without exercising their choice, new employees might be included in a default moderate strategy, when they should actually be in an aggressive investment strategy while they are young and accumulating assets.”
“Some companies give employees a choice over how much of their salary they would like to contribute to a retirement fund. Maximising your tax-deductible retirement contribution is one of the best ways – especially for young employees – to save in a tax-efficient manner and create healthy financial habits from an early age.”
Equally important to knowledge of what an employer offers – is realising what benefits are not included in a remuneration package. There may be elements excluded that a new employee might have assumed would be included, or certain benefits which may only be offered to more senior employees.
“New employees must be sure to find out whether – and to what extent – their employer offers benefits such as life and disability insurance, income protection or funeral cover. This may make a big difference to discretionary income if it has to be paid for separately or topped up from net income,” he says.
Finally, he urges new employees to understand whether they are paid a different salary while they are on probation – often the first three months of starting a new job – than when they are permanently appointed.
“While employees are on probation, they may not be part of the company’s risk and retirement fund, so these contributions are not deducted. It is advisable to obtain a mock salary slip of what your ‘permanent’ remuneration would look like from the HR department – however presumptuous this may appear – to avoid having to make a significant lifestyle adjustment after your probation period.
He concludes that the key to making good decisions, from early in a career, is to ask questions and get advice – regardless of how simple they may seem: “Everyone has had a first payslip and it is only natural to question how your salary is calculated. It is best to ask these questions when you start working, get clarity and professional advice, and in that way maximise your earnings and savings from a young age.”
Practical suggestions (to consider as a possible sidebar): Stretching your income as a new employee
Living with parents for as long as possible. “While you may not like the idea of living with your parents when you earn your own money, this makes the most financial sense. Even if you
contribute a marginal amount towards food and living costs, it will highly likely still be cheaper than renting accommodation.”
Sharing accommodation for the first few years. “If you cannot live with your parents, the next best option is to share accommodation with other people, perhaps until you can afford a small place of your own.”
Setting financial goals: “Alongside starting to save with your first salary, this is a useful financial habit to get into. Set yourself a goal of going on holiday, or buying a car – this will enable you to work towards something tangible, and it makes sacrifices easier.”
Not splurging all your discretionary income: “It is tempting to buy the fancy car you have always dreamed of when you start working, but the novelty eventually wears off, while the payments stay with you. If you have to purchase a vehicle, opt for something modest and practical while you are young.”
Investing from a young age. “This can be investing towards your retirement, or saving towards buying a property, even if you will lease the property. This is one of the best ways to compound your savings.”
Getting professional financial advice from early in your career. “When speaking to your HR delegates, they are often able to point you towards financial advisors who are linked to the company’s benefits consultants to help you structure your retirement planning optimally for your circumstances.”