I recently came across a post on social media that resonated with me: “You work 40 hours a week to earn your income. The least you can do is spend 20 minutes managing it.” This is so true! If you don’t manage your money, it will end up managing you.
Unfortunately, many people are experiencing this right now. Living paycheque-to-paycheque means that your salary only lasts half of the next month at best, and you have no Plan B if something catches you off-guard. This is one of the reasons why so many people are drowning in debt.
It’s time to break the cycle! Here are four basic but effective steps to take back your financial freedom.
• Decide on goals and get insurance: Your goals can be short-term (1-2 years), medium-term (3-5 years) or long-term (6+ years). Short-term goals typically include building an emergency fund or paying off a small debt like a student loan. A medium-term goal could be putting down a deposit for a house or a car. Long-term could be saving for your kids’ education, investing for your retirement or paying off your home loan.
Deciding on your goals goes hand-in-hand with planning for the unexpected. What if you die while you’re still raising your children? What if an illness or disability prevents you from earning an income? This is where insurance comes in. A life insurance policy should be one of your priorities. The policy should include additional benefits such as disability and critical illness cover for your family.
• Make a budget This is vital! There are a few options when it comes to a household budget: You can use the tried-and-tested 50-30-20 method, where 50% of your after-tax income goes to essential expenses like rent and food, 30% goes to non-essential “wants”, and 20% goes into a savings account or is used to pay off debt.
Another option is zero-based budgeting, where you start with a clean slate every month and set your budget according that month’s priorities and available cash. With this method, you might have to compromise on certain things in certain months depending on how much surplus cash you have.
The two methods are not mutually exclusive. With the 50-30-20 method, you will quickly learn to differentiate between your needs and wants, and you’ll make sure that money is allocated to savings and investments regardless of your other monthly commitments. With the zero-based method, you’ll make sure that every expense is accounted for each month. Plus, you’ll force yourself to review your budget on a regular basis.
It doesn’t actually matter whether you combine the two or choose one over the other. The most important thing with any budget is that you scrutinise your priorities and focus on why instead of what. Write down all your monthly expenses and ask yourself how each expense is contributing to the financial goals that you have set. If they’re not contributing, get rid of them!
• Start an emergency fund: Things happen and you need to be prepared. An emergency fund is a pot of cash that you can access easily if life throws you a lemon, like a medical emergency or an unexpected retrenchment. The rule of thumb is to save about six times your monthly salary to keep your family going while you make a plan.
With an emergency fund, you must be able to access the money immediately without paying penalties. Choose a fund that offers low but stable performance instead of a riskier, more volatile investment.
• Manage your debt: There is good debt and bad debt. Good debt helps you gain an asset in the long run that appreciates over time – a home loan is a great example. Bad debt is the opposite: it allows you buy something now that you wouldn’t otherwise be able to afford, and that thing depreciates in value over time. Sorry to say, but that expensive new car in the driveway is an example of bad debt.
You need to balance the good and bad debt. What can you get rid of that will save you thousands, if not hundreds of thousands, over the repayment term? Write down the interest rates for each of your debts and rank them from lowest to highest. You don’t want any high interest rates, which are typically applied to short-term credit like a store card, for example. Allocate any spare money to the highest-interest debts first, pay them off and wave them goodbye.
Final word: Sorting out your finances is easier said than done. All of these tips really work, but they can be confusing and difficult to implement on your own. My advice is to seek the counsel of a Certified Financial Planner® – a registered professional who will be able to help you with a budget and recommend the best investment products depending on your family situation, your income and your lifestyle. Find a professional near you by visiting www.fpi.co.za
• Thloloe is co-founder of Imvelo Wealth Solutions
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