South African’s are really feeling the pinch of rising interest rates and rising costs of goods and services in general. Added to this, there are far too many South Africans who are unemployed, meaning that those who are fortunate enough to still have work must stretch the Rand even further by looking after unemployed family members. This is, in no doubt, unsustainable and requires us to make many changes to our spending habits in order to make ends meet.
So what do we do?
We have to be more careful about where our money goes and one of the ways to do that is drafting and sticking to a strict, but also realistic, budget.
Step 1: We start by setting goals. Clearly write down what it is you would like to achieve with your personal finances in the short term (in the next two years), medium term (between two and 5 years) and long term (longer than five years) and list the possible ways in which you will go about achieving them. Here are a few examples:
- Short term goal – setting up an emergency fund
- Medium term goal – paying off credit card debt and other personal loans
- Long term goal – paying off home loan in less than the allocated 20 year term
Remember to keep your goals clear, achievable and easy to track.
Step 2: Start budgeting. Start your budgeting process by differentiating between wants and needs and allocate your money towards your needs first. This may include the following:
- Rent/bond repayments
- Food (excluding eating out)
- Utilities (water, lights, rates and taxes)
- Transportation(public transport or car repayments plus fuel)
- School fees (if you have children)
Wants may include the following:
- Traveling
- Eating out
- Going shopping
- Entertainment
One of the most effective tools to help you budget is the 50/30/20 which is a monthly budgeting method that tells you exactly how much to put towards your wants, needs and savings/debt repayment each month.
This method requires you to divide your monthly after-tax income into three categories: 50% for needs, 30% for wants and 20% for savings or paying off debt.
Step 3: Plan for emergencies. Life is filled with so many challenges and unexpected events. And, if we are not prepared for most of them, we may find ourselves in financial ruin. Insurance is one of the best ways to protect us against some of these misfortunes such as accidents, sickness, disability and death.
However, some life events cannot be insured and we have to produce the money ourselves. Examples include a family emergencies, accidents not covered by insurance and unexpected car repairs.
Having an emergency fund is one of the best ways to remain prepared for these life events and prevents you from getting into debt. Here are some tips to regarding emergency funds worth noting:
- Try to accumulate as much money for emergencies as possible. The recommended amount is for you to be able to cover up to 6 months of your annual expenses with these funds.
- The money must be in an account you can access with ease. This money is not to be invested but placed in a cash account where you can access it without difficulty. Notice deposits or money market accounts work well in this instance
- Automate your savings. We all know how difficult it is to save money. life also gets in the way and we often find excuses not to save. One of the best ways to accumulate money is by setting up a debit or stop order that goes off your account on the same day of the month, every month.
Step 4: Consider speaking to a professional about your personal finances. There are some advisers and institutions who offer cost-effective, and sometimes pro-bono advice. Do your homework and find a professional to assist you. Speaking to a qualified and licensed advisor can make a big difference to your personal finances and go a long way in allaying your fees and set you off in the right direction.
Finally, while navigating life and its many challenges, remember that this is temporary. Keep exploring ways to improve your income and reduce your expenses and always maintain a positive outlook.
By Gugu Sidaki – Director and Wealth Manager