Spring has just begun, but before you whip out the broom, feather duster or spade for those essential spring cleaning chores around the house, you should spring clean your finances.
John Manyike, the head of financial education at Old Mutual, and Susan Steward, the marketing manager at Budget Insurance, have some helpful advice.
“Spring is in the air, bringing with it the opportunity to refresh and sort out our lives,” Manyike says. “For some, this may involve clearing out that chaotic cupboard, for others, it will be about bringing order to the garage. But for everyone, it should also mean tackling your finances and getting them into better shape.
“With the struggling South African economy and ongoing global uncertainty, it has become essential regularly to review your finances to ensure they can withstand the challenging financial environment.”
Manyike says the better organised you are, the more control you will have over your money.
“You want to be in control of your finances, not the other way around. However, spring cleaning your finances can be a daunting task, even for the most seasoned cleaners. There are debit orders, loans, outstanding balances for clothing accounts, car or house maintenance invoices, income statements, retirement plans, insurance policies, and so many other boxes to tick.”
Manyike says you should do the following:
• Make a list of all the items you need to address: short- and long-insurance (life, car and household), debt, savings and unnecessary subscriptions.
• Examine your monthly budget, and if your expenses exceed your income, cut out things you can do without. Just like you get rid of broken equipment or furniture that is taking up space unnecessarily, eliminate all expenses and purchases that are not essential. Be very clear on the difference between needs and wants.
• Aim to set aside 20% of your disposable monthly income (the money left in your bank account after deductions). Put this money into a savings or investment account. If you can’t afford 20%, settle on 10% or even 5% – any amount is better than not saving.
• Get your debt under control and borrow only if the loan is part of your wealth-creation strategy. Know the difference between good debt and bad debt. A home loan, for example, is generally considered to be good debt, because property is an asset that typically grows in value. But using your credit card to buy an item that depreciates in value is bad debt.
• Pay off debt with the highest interest rate first. For example, if you have a mortgage bond at an interest rate of 10% and a personal loan at a rate of 20%, pay off the loan first.
• Prepare adequately for retirement. The sooner you start the better. Take out a retirement annuity and invest your money where it can grow.
“People who plan ahead are always in a better position in the long run than those who don’t. Peace of mind comes to those who take charge of their financial future,” Manyike says.
Steward says South Africans are having to dig deeper into their pockets every month to cope with the increasing cost of living. Add to that the cost of servicing expensive debt, and it’s clear that smart budgeting is crucial.
Data released by Statistics SA last month showed that many consumers are under debt-related pressure, with 48 169 civil summonses issued for debt in June, to the value of more than R350 million.
“Changes in both the economy and your personal life affect your budget, which is why it should be revisited on a regular basis,” Steward says.
Budget Insurance recommends you ask the following questions:
• Have my income and expenses changed? With many people receiving their annual increase in July, you may have a little more in your bank account each month from the middle of the year. Think about how best to make use of this extra money.
• Have I been slack in paying off debt? It’s easy to get caught up in buying on credit and forget about how much debt you’re racking up. Go through all your statements and pay off outstanding debt, or at least put a plan in place to do so.
• Am I cutting corners where I shouldn’t be? Insurance is one of the expenses that often gets the chop when people cut back. The question you should ask isn’t whether you can afford to be insured, but whether you can afford not to be. Without appropriate cover, you could be far worse off financially if, for example, your car is written off or all your household items are stolen.
• Am I willing to compromise and reprioritise? You love that expensive perfume, you really want those designer shoes, you can’t live without that pricey steak once a week, but when you’re feeling the squeeze at mid-month you may find yourself regretting those purchases. You don’t want to be in the position of having to compromise on the important things, such as health care or your children’s education, so buy down or cut back on things you don’t really need.
• Have I been sticking to my saving goals? There are many ways to break the bad habit of not saving. These include setting up a monthly debit order to an investment account, opening a tax-free savings account and increasing your contributions to your retirement fund.
• Do I have an emergency fund? Where would you get the money if, for example, you were laid off work or your car needed major repairs? It’s vital to have a financial safety net in place.
• Do I track my spending? This doesn’t mean scrutinising every cent you spend, but identifying your spending patterns to see where you could save. A good way to do this is to look at your monthly bank statements to see where most of the money is going. You may be surprised by how much you’re spending in certain areas. Making small changes could keep your spending in check.
• Am I paying for things I don’t use? You could be paying subscription fees for magazines you don’t read, a gym you don’t attend or a bank account you no longer use. You could be wasting money that should be going towards saving or paying off debt.
• Are rewards programmes really benefiting me? It’s tempting to join every loyalty programme on offer, but beware that you may be overspending to receive something small in return. Always read the terms and conditions carefully before signing up for rewards programmes, because there may be hidden costs.
• Am I empowering myself with financial knowledge? The internet is a good way to find information that will enable you to understand the basics, but you should consult a financial adviser before making decisions about saving and investing.