With the current economic conditions, it is essential that South Africans become more realistic about their finances and effectively manage their debts. This is according to John Manyike, Head of Financial Education at Old Mutual.
January 2018 has arrived with many South Africans left financially unprepared for the responsibilities that come with a new year.
Not only did the last year see living costs rise, but many had to battle with mounting debt as they struggled to make it to the end of the month. The 2017 Old Mutual Savings and Investment Monitor indicates that 16% of the average South African’s monthly income is spent on paying off debt, while only saving 15% of their salary every month.
If you are starting the New Year on a zero or negative bank balance and are relying on credit to purchase back to school supplies or even just to see you through to the end of the month, then 2018 represents an opportunity to kick your bad spending habits – and emerge a more mature and sensible spender.
First things first: in order to be a more sensible spender and saver in 2018, you need to learn from your mistakes. It is vital that you take stock of your 2017 finances, by requesting a credit report.
“You are entitled to one complimentary credit report a year so it would be wise to make use of this service,” says Manyike. “Your credit report will provide you with a detailed run-down of your credit profile, which will enable you to effectively gauge your risk profile. Credit providers rely heavily on this information to assess your credit application before approving any further credit.”
He adds that it is crucial to set goals and put a financial plan together. “If you need the help of a professional, then contact an accredited financial adviser – these advisers are available to everyone,” he adds.
Becoming more realistic when it comes to your monthly budget is another way to ensure your financial freedom. “When you have assessed all your monthly expenses from 2017, you need to set a realistic monthly budget for 2018. It would be wise to be always disciplined with your budget whilst ensuring that you include a savings pocket for every month to handle any unforeseen expenses, like car issues or- unexpected medical expenses,” Manyike explains.
In order to avoid another festive season budget overrun, set aside a festive season budget now and make small contributions towards your children’s 2019 back to school expenses.
Understanding the difference between ‘want’ and ‘need’ expenses is a crucial component of your Money Rehab. A “need” expense is a necessity to keeping your household going for the month, like essential groceries and debt payments. While “want” expenses are definitely something you can do without, like that handbag you have been dying to have.
Manyike says that a good rule of thumb to differentiate between a ‘want’ and a ‘need’ purchase, is asking yourself whether or not the purchase can wait until next month. “If the answer is yes, don’t buy it… you don’t need it. However, if the answer is no and it is essential to your survival then it is a ’need’ purchase,” he adds.
An important part of becoming more realistic also lies in evaluating your lifestyle. “When you have all your financial information in front of you, have a look at how many times a month you have dined out or entertained yourself and your friends. Try to cut back on any unnecessary lavish lifestyle purchases for a while. It is remarkable how eating out can take up much of your monthly budget.”
The last essential element of your 2018 Money Rehab is paying off your debt. Don’t let your financial digressions of 2017 weigh you down in 2018.
“It would be a good idea to consolidate all your debt into one loan and pay off one loan instead of many debts. However, if you are unable to do this, start by paying off your most expensive debt first, for example, your credit card, or store cards with a high-interest rate. Also, keep in mind that it will be counterproductive to incur additional debt in 2018. Try your best to make 2018 completely debt free,” he explains.
In order for you to effectively manage your finances in 2018, you need to critically evaluate your expenses with your budget every month.
“You need to make sure you are within your budgetary means every month by constantly evaluating your expenses. By doing this, not only will you stay within your budget but you will also be able to make better financial judgments on ‘need’ and ‘want’ purchases”.
Tips to follow during your Money Rehab:
Be realistic in your budget – draw up a budget you are capable of sticking to
Don’t go further down the debt hole; avoid unnecessary purchases on credit – if you can’t afford it, become disciplined and rather save for it.
Try to consolidate your debt into one loan.
Check where you can get essential groceries for less.
Cut back on lavish lifestyle expenses.
Eat in, instead of dining out.
Critically analyse your bank statement at the end of each month to monitor your spending habits and ensure that you are not indulging on non-essential items.
Use any additional income to charge down debt.
Consider getting a second part time job to supplement your income.
Don’t be afraid to contact an accredited financial planner to assist you to stay in line.
Close all accounts you are not using or haven’t used in a couple of months, this will help you avoid incurring additional debt.
Save a portion of your salary for emergencies or unforeseen expenses.
By following these helpful tips, not only will you be able to effectively maneuver through any tough financial situation, but you will be well on your way to financial freedom.