Tough times call for tough financial decisions
For most people, times could not be tougher, and implementing a budget will go a long way in taking ownership of your finances. Knowing where you spend – and where you want to spend your hard-earned money, will have a substantial impact on your long-term financial well-being.
This is according to Duann Cronje, a Certified Financial Planner at Fiscal Private Client Services. He shares three easy steps to help those who need to get on top of their finances.
1 Start with your savings
Pay yourself first. This is a widely used phrase that means before spending your hard-earned money, make sure you have put a portion aside for savings and investments. “Not doing this is a common mistake made by many who are battling to save and invest.
“A good money habit is to save 15% of your total salary for your retirement. Start by saving this percentage as early in your career as possible. Let your certified financial planner advise where you should invest – solid options include a Pension Fund, a Provident Fund, a Retirement Fund, or a Tax-Free Savings Account. Choose something that is a long-term investment that you do not plan to access. By doing this you are letting compound interest grow your money for you,” says Cronje.
The recent pandemic will have highlighted the importance of having an emergency fund with easy access to your capital. The goal is to save between three and six months’ worth of expenses in an accessible investment. “This should be an ongoing savings project and I encourage people to top up this fund regularly,” explains Cronje. His advice for an emergency fund is to essentially replace a credit card and keep South Africans away from bad debt: “You should be ‘borrowing’ from yourself, and not borrowing what we call expensive debt – like a credit card that has a very high interest rate.”
Another good practice is to plan ahead and anticipate upcoming expenses, says Cronje, for example: “Can you start setting aside money for 2021 school fees? Can you start putting money aside for your upcoming wedding? Or how about saving for a deposit on your first home? These are all big expenses that should all be thought through and included in your budget; that way it is easier to save for them in advance.”
2 Know your necessities
The next step is scrutinise your necessities. These are your bulk items such as rent or bond, medical costs, insurance, contracts, transport, utilities, and all the other expenses that eat into your disposable income.
“One of the biggest mistakes people make is spending too much money on cars. There are plenty of arguments for, or against, buying a new versus a used car, or whether you should finance a car or save up enough money to buy it cash. Because we all need to get somewhere, it is extremely difficult to limit transport-related expenses; but keeping costs as low as possible should be your priority,” says Cronje.
Another important consideration in this section of your budget is to ensure you manage your risk. “If your biggest investment is your house, then you should have it comprehensively insured. If you have a long family history of illness, then you should prioritize protecting your health and the potential future costs surrounding this. A somber thought but even more devastating if you have not prepared for it.
“It is also very important to protect your ability to earn an income and this should be one of your first priorities. If your emergency fund is low, you should make sure that your assets are insured to lower the risk of a big expense that you cannot afford. For example, should your car be stolen, and it hasn’t been insured, do you have enough money to buy a new one? My advice is to give yourself the best chance of avoiding unforeseen expenses and entering unplanned debt,” says Cronje.
3 Don’t go broke trying to look rich
A quote made popular by actor Will Smith goes like this: “Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like!” Ask yourself honestly if you are living within your means.
“Everyone is on their own path and this is true for your money journey too. The best thing you can do for yourself today is set a budget and keep practicing the discipline of sticking to it. It’s a bit like being on a diet to shed unnecessary kilograms – it can be difficult to change your daily eating habits, similarly the numbers on a spreadsheet will mean nothing if you don’t follow through with curbing unnecessary daily spending. The good news is that once you start seeing the benefits you will enjoy the results of a new and rewarding way of life.
“Remember that the money decisions you make today will impact on your financial situation tomorrow. If you spend less than you earn and keep saving, even the toughest of times will not last,” concludes Cronje.