M&G Money takes a look at how to put together a financial plan, with the help of Sanlam Financial Advisers and Tumi, a character who represents the financial reality as well as hopes and dreams of many of our readers.
At the start of our series, 35-year-old Tumi has recently had her first child, which has had a significant impact on her priorities. Although she earns a good salary, she spends more than she earns and would like to start being more disciplined with her money to provide for her daughter’s future.
Thabisile Khoza, business development manager of Sanlam Financial Advisers, now provides Tumi with some tips on how to start getting her budget in order:
Most people feel that the money they earn is not enough to live on comfortably. It seems that no matter what the income is they have trouble living on it! Some have more financial responsibilities than others, and therefore spend more money. But, often, having some money left at the end of the month is about managing your money effectively — or budgeting.
The first step to starting a savings plan would be for Tumi to draw up a budget. While this may sound a little overwhelming, it is very simple and Tumi does not need to be a financial expert. It is just a list with her expected income listed on one side and her expected spending and savings on the other.
For this Tumi needs some basic information — she needs to know exactly how much she earns and what her expenses are. In order to analyse her spending, she can divide her expenses into essential spending, essential variable spending and discretionary spending.
Tumi’s essential spending is, for example, her bond payments, unemployment insurance, tax, debt, motor vehicle instalments and crèche fees. Her essential variable expenses are expenses where the amount she spends can be varied, such as service fees, groceries, telephone and cellphone accounts and fuel. All these must be taken into account before Tumi can budget for discretionary expenses such as eating out and buying new clothes or shoes.
A budget therefore will help Tumi to plan and provide better for all kinds of eventualities such as death or disablement, and also for those things that she cannot afford now but that she would like to or have to pay for later.
Start saving
Tumi must start saving to manage her finances successfully. Sticking to a savings plan is probably the most difficult part of budgeting. Many people think they should first spend their salaries on the things they want and whatever is left over could be saved.
However, it should work the other way around — rather save money in order to afford the things you want. Tumi should use short-term savings to pay for particular expenses such as a pair of shoes. Her long-term savings goals are much more important — they should create wealth to ensure her financial freedom. Another long-term concern could be her child’s education — and the earlier she starts saving for it, the better.
Tumi can also make a contingency fund a part of her savings plan. If she can save three to six months’ worth of income for emergencies, it will help her not to incur debt to pay for emergencies such as sudden vehicle repairs.
Redeem debt
But, very importantly, Tumi must manage her debt to take control of her financial future. To borrow money, even in the short term, can be a very costly exercise when it’s borrowed for the wrong reasons.
Credit and store cards can have very high interest rates and Tumi must redeem her debt with the highest interest first.
Currently she owes R5 000 each on her credit and store cards and repays R500 monthly on each.
It will take her nearly a year — 11 months, in fact — to redeem this debt, which can carry interest rates of as high as 17,5%.
If she cuts back on her monthly cellphone and entertainment expenses and pays back just R170 extra on her credit card, it will take her only eight months to redeem this debt and will put R670 back in her pocket.
Tumi must therefore try not to incur debt for discretionary spending. Many people don’t know that some retail stores have very high interest rates and hidden costs. It is very easy to end up in a debt trap that spirals out of control.
While some things often have to be bought with a loan, such as a car or a house, Tumi can buy the less expensive things with cash she saves.
There are also other ways of reducing debt. If she can, she must also make an extra payment into her bond. Such an extra payment is also a valuable investment — interest is calculated daily and every little bit helps.
She can also try to negotiate a better rate on her home loan of R600 000. A lower interest rate can have a major impact on what you pay back on your home loan.
She and her husband can, for example, save R400 a month if the interest rate of their home loan is 1% lower. If they use this R400 as an extra payment into their bond, they can pay it off in 16,5 years instead of 20 years.
The basic rule for Tumi to create wealth is that she will have to spend less than she earns.
Next month we analyse Tumi’s insurance needs, especially now that she needs to provide for her child’s future
Tumi’s financial situation
Income:
Tumi’s take-home pay is R11 200
Bond:
Bond value: R600 000
Tumi and her husband each pay R3 000 into their bond
Short-term debt:
Tumi owes R5 000 on her credit card. She just pays the minimum requirement of R500 a month.
Tumi owes R5 000 on store cards
Car finance: R2 000 a month
Expenses:
Debt repayments: R6 000
Cellphone: R600
Groceries: R1 000
Household bills: R500
Entertainment — Tumi eats out twice a week: R1 000
Clothes — R1 000. Tumi loves shoes
Crèche: R1 000
Petrol: R1 000
Tumi spends R900 more than she earns