Time to trim the fat - Get back in financial shape this spring
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By Debra Slabber
There’s an old saying in the world of fitness – “summer bodies are made in winter”, meaning that, although it is common for us to let our fitness regime slip in winter, it is actually the season we should be using to get our bodies in shape for summer. If one had to apply the same logic to finance, it could be something like Oscar Wilde’s quote - “when I was young I thought that money was the most important thing in life; now that I am old I know that it is.”
Now and then we all get a little complacent with life. Sometimes we exercise less during the cold winter months and we eat a little more comfort food. The best of us sometimes lose sight of our goals (whether it is health, career or finance related) or maybe we get lazy with things like budgeting and saving.
In South Africa, 1 September is known as Spring Day, signalling the approaching change in season from winter to summer. This time of year is known to act as a trigger for people to tackle their annual “spring cleaning” ritual – they get rid of old or unused items, deep clean the house and do some general reorganising. It is also a time when people start questioning their fitness routine, spending more time outdoors and unpacking and trying on those summer clothes again. At Morningstar, we would like to suggest that we all start the habit of using Spring Day, as a day to trigger the reassessment of our savings as well.
For the past year and a half, South Africans have faced extremely difficult circumstances from a financial, health and emotional perspective. It is okay to be exhausted, emotionally, and physically. It is okay to feel a little run down and behind in your goals. The wonderful thing about spring is, that it reminds us that life continues. New flowers will soon bloom, the sun will shine a little longer as each day goes by and the temperature will start to rise. Seasons do change, and so can we.
Spring is the perfect time to dust off your financial plan and re-assess if it requires some tidying-up. Now more than ever is important to get back into financial shape.
Back to the basics
A good starting point to get back into financial shape is to take stock of where you are. Make a list of all your assets, liabilities, monthly income, and monthly expenses. This will give you a good indication of what your financial position looks like and it is important to be honest with yourself here.
- Assets refer to anything that you own, for example, property, investments in shares, unit trusts, money that is owed to you and cash in the bank.
- Liabilities refer to your debt, outstanding payments and loans - for example, your home loan/bond, car loans, student loans, credit card debt, etc.
- Income can include your salary, rental income, interest, and dividends earned.
- Expenses include all your fixed expenses - for example insurance payments, levies, and medical aid, as well as variable expenses (like groceries and electricity).
Start with the end in mind
When you know what your goal looks like, it is much easier to visualize and plan how to achieve it. Make sure your goal is well defined, obtainable and realistic. For example, if you want to lose 10 kilograms over the next couple of months, your plan will look very different to that of someone whose goal it is to run a marathon. Although being fit and healthy are the ‘means’, the end is very different. Know what you want your end to look like.
Perhaps it is a comfortable retirement, perhaps it is saving enough to start your own business. Whatever it looks like, it's important to establish clear goals so that you know exactly what you are working toward and what you need to do to get there.
Budget, budget, budget
You can't identify your healthy (and unhealthy) financial patterns until you put a budget in place. Your budget is essentially a plan for how to spend your money each month. Look at your spending over the last few months (or compare the same month with that of a year ago) to get an indication of what you usually spend in each category. There are many budgeting templates available online if you get stuck. (Here’s an example of a Budget Worksheet our global team created.)
In the wise words of James W. Frick - “Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.”
The key to setting up a successful budget – even for a beginner – is that you must monitor how far you are sticking to or deviating from your budget. Keeping track of your monthly income and expenses against your budget will give you a much better view of where your money is going, show you where you are overspending and/or where you are saving. That brings me to the next point.
Spend what is left after saving – pay yourself first
Saving should be part of your budget. The easiest way to prevent yourself from spending what you should be saving is to set up a monthly debit order and let it do the work for you. Warren Buffett’s words will always ring true - “Don’t save what is left after spending but spend what is left after saving”.
You can use your annual tax-free savings contribution allowance of R36,000 (that’s up to R3000 per month), increase your retirement annuity contribution and/or save by using other products available at your disposal, such as fixed deposits and money market accounts.
It is important to note that, it’s the habit of saving that matters most, and less so the actual amount. Of course, the more you save the better, but getting into the habit can be the hardest part. You will be surprised how rewarding it is to see how quickly you can build up a nest egg and the incredible power of compounding.
Have you invested appropriately for your risk profile?
As we enter new or different phases in our lives, our risk profiles can change. It is a good idea to take stock of all your investments and do an asset allocation check on an annual basis. Have you invested appropriately for your risk tolerance, time horizon, age and financial circumstances? Do you have enough offshore exposure? Perhaps you have been de-risking too much or taking too much risk. Speak to your financial adviser to adjust your portfolio to reflect your risk profile correctly.
A small word that often evokes big emotions is ‘tax’. Unfortunately, only two things in life are certain: death and taxes. Whether we choose to talk about it or not, the reality is that tax is inevitable. What you can do as part of your spring-cleaning exercise is to get a professional to assess whether your financial plan is structured in the most tax-efficient way possible.
In addition, tax return season is open – SARS has announced that their filing season will run from July 1 to November 23 for individual taxpayers, so get those tax returns filed nice and early.
Insurance and risk policies
Perhaps part of reviewing your financial plan should be to do a check to ensure that all your short-term insurance, medical aid and other policies (for instance life cover, funeral cover, disability cover etc.) are still relevant and accurately reflect details about your circumstances and beneficiaries. Consider if it is time to add or remove policies.
As part of cleaning up your act and getting back into shape, consider having a look at your will. Do you have one? Is the information, assets, beneficiaries etc. still relevant and applicable? What can you remove and what should you add?
Consider your emotional well-being as well
Most definitions of financial health are very one-sided. It often focuses only on economic or financial stability. Ignoring your emotional well-being could be a recipe for disaster.
Being financially healthy is not just about having enough money to cover your expenses—it’s also about feeling emotionally at ease with your finances. People who feel empowered in their financial lives also experience more joy, peace, satisfaction, and pride concerning their finances.
Getting back into shape can be a daunting task, so take it one step at a time. It is recommended that you review your financial plan with your financial adviser at least once a year (barring any life-changing events that might take place in between, such as getting married, having a child, losing your income etc.). If you haven’t done so in a while, don’t lean into the temptation to bury your head in the sand and ignore the issues that might exist – the solution is often more achievable than you think. While the worksheet we shared may seem daunting, don’t feel overwhelmed, you don’t need to do everything at once. Just start, do what you can and take it one step at a time (remember, Rome wasn’t built in a day).
The key to being successful is to stay motivated throughout the process. Now and then you are going to have a setback. You are going to give in and eat that decadent slice of chocolate cake and/or dread your next workout. And that is okay. As long as you keep doing your best and get back on track as soon as possible.
Share your goals with your financial adviser and family to keep yourself accountable, break down your goals into smaller steps, and reward yourself when you hit major milestones. With patience and commitment, you can improve your financial situation and rest easier about your future.
By Debra Slabber is a Portfolio Specialist at Morningstar Investment Management SA