The start of the New Year presents a chance to get your finances in order. Make 2007 the year you take control of your money and get financially fit.
Financially fit people do not have debt. Apart from a house, which is “good debt” because it increases in value, and affordable car repayments, you should not have any other debt. As an analogy, when you start going to gym to get fit, you first need a workout programme. Your financial workout programme is your budget. Your budget should include everything from your mortgage repayments, electricity, food, clothing, school fees and all debt repayments.
Making up a budget and understanding where your money is going each month may help you find ways to cut back on spending and find the extra cash to pay off your debt faster. You may also be surprised to see how much of your monthly salary goes towards paying off debt. Once you are out of debt that money is freed up to start a savings fund.
Allister Long of LifePower, a company that provides financial education, says when people analyse their monthly expenses they often discover inefficiencies. For example, a staff member of a company Long consults to had two funeral policies as well as the company’s pension fund, which provided for funeral cover. He was unaware of what his company provided and was over insured.
“Once he understood his needs he cancelled one of the policies and used this money to start paying off his debt.” Long says that funeral policies are one area in which people tend to overspend as they are heavily sold by financial institutions. Make sure the cover your policy provides is adequate and don’t take out additional funeral cover as they all incur additional administration costs.
Long says that most of the people he counsels who are in a debt trap have never worked out a budget.
“When people write up a budget they understand where their money is and what they are doing with it.”
You may find, says Long, that there are places where you can cut back, and this would help prioritise which debt to pay off. You should always start with the debt incurring the higher interest rate.
Getting fit is not something that happens overnight, so set reasonable goals. Choose one item of debt you would like to settle by the end of the year and make that a priority.
Apart from paying off debt, saving for future short-term expenses is also important – a lot like sticking to a balanced diet while going to gym. Your budget should also take into account future expenses that you know you will incur during the year. For example, your child might go on a sports tour in a few months’ time, or you know that your fridge is very old and you’ll probably have to replace it during the year. Start a savings fund for these expenses so that you will not have to borrow money at the time. By saving in advance you will avoid having to use credit. If you buy furniture on credit for R5 000, it will cost you as much as R8 300 by the time you have paid it off. Basically you have paid the store R3 300 extra for using credit. When you are financially fit, you will find you have more money as you are paying less interest to the furniture store or bank.
Repossession is another reason not to buy on credit. When you buy something on credit and are unable to meet the monthly repayments, the item could be repossessed. “It is unlikely they will be able to get more than 30% of the value by reselling it second hand and the customer will still owe 70% to the store,” says Long. For example, the furniture you bought for R5 000 has been taken back by the store, but you still owe them R3 500. You will be paying for something you no longer have.
The good news is that with the introduction of the National Credit Act, retailers and banks will have to look at your entire financial situation before providing you with credit. This will help ensure that you can afford the debt without getting caught in a debt trap where your monthly repayments are more than your disposable income.
However, Long says that while the banks may consider how much debt you can handle by your ability to repay the monthly instalments, if your repayments mean you do not have any money to save, then you cannot afford it.
If you cannot save for future purchases you will always be in debt.
Six steps to financial fitness
Apart from your budget you need to review all the areas affecting your finances.
Make sure your will is up to date. If you don’t have one in place, now is a good time to write one.
Review your short-term insurance. Make sure you are adequately covered and that any new expensive purchases are added to your household contents list.
Review the book value of your car and adjust your premiums accordingly. Phone around for rates to make sure you are getting the best value for money.
Review your life cover and make sure it is enough to cover your debts and to support your dependants. Life companies continuously bring out new products so make sure that you are getting the best possible deal.
Change all your PINs and passwords to all your accounts but make sure you do not use the same numbers for all your accounts because if one is compromised the criminal has full access to all your funds.
Review your homeloan. Most people’s risk profile changes over time and if you have been promoted, changed jobs or even received a salary increase, you represent a significantly smaller risk to the banks. They should reward you with a better interest rate on your bond.