Nobody said 2010 was going to be easy. But making sure you have enough money to make it through the year should be at the top of your to-do list. Maya Fisher-French gets personal on your finances
How to budget
This is how your money should be spent:
35% on household expenditure: This includes spending on domestic wages, food, communications, entertainment, security, travelling costs, water and electricity.
25% on financial services: This is how much you should spend on long-term life assurance products, short-term insurance, medical aid, pension contributions and towards longer-term savings.
35% on debt repayments: This includes your mortgage (or rental), car repayments, credit cards and store cards. When taking out a mortgage, make sure your repayments are not more than 23% of your income.
5% on emergencies: The remaining 5% should be allocated specifically for emergencies and not long-term savings.
Debt is the culprit
Paul Slot, director of personal finance wellbeing and debt counselling specialists Octogen, says most households spend about 47% on debt repayments. The 12% difference between what a household should spend on debt and what households actually spend comes directly out of savings. If you live beyond your means, your debt-serving costs are probably to blame.
Budget tools
Check out the budget template on www.mydebt.co.za or invest in budget programs such as Microsoft Money or Quicken to help reconcile your bank account to your budget.
Get out of debt
How much is too much? If your debt repayments are more than 40% of your income, you have a problem. Cut back.
Start low: Start with your lowest and most expensive debts first. Psychologically it is a boost to pay off something in full.
Set a target: Draw up your budget and cut back on non-essentials. Then set a realistic plan on how much debt you can repay each month.
Cash in envelopes: The best way to stick to a budget is to put a month’s worth of cash into envelopes for day-to-day expenses, such as groceries, entertainment and petrol. When the cash is finished, you can’t spend any more.
Remove the temptation: Once your debt is paid off, cut the line of credit. Cancel your personal overdraft and throw the store cards in the bin. One credit card with a low limit can be useful for emergencies if you have the discipline not to use it. At the very least, have a debit order that pays off your credit card in full each month.
Budget for life: The only way to stay out of debt is to run a monthly budget to ensure you balance the books. Save ahead for big-ticket expenses.
How to save
Start a savings club: A recent survey showed that people who saved through a savings club were a lot less likely to stop saving during tough economic times. It’s also a good excuse to get together for coffee or a glass of wine.
Save first, spend later: Don’t try to save what’s left at the end of the month. There never is anything left. Rather have a debit order that goes off at the beginning of each month — if it is not in your account, you can’t spend it.
Keep it simple. There are so many products on the market that it becomes confusing to decide where to invest. If you are trying to save a few hundred rands a month towards a future nest egg, go for cost-effective investments with low monthly minimums. Satrix has a range of tracker funds that give you equity exposure at low costs. A flexible unit trust is another good option, but watch the costs. Some companies such as Stanlib charge 5% upfront even if you go direct, whereas Investec Asset Management has no upfront fees.
Cash is not king: For long-term savings cash is the most risky investment. If you had saved R100 a month in a bank account for 35 years from the end of September 1974 until the end of September 2009 your money would have grown to R325 857 after tax. If you had invested R100 a month on the stock market over the same period and received the return of the FTSE/JSE All Share Index (including dividends), your money would have grown to R3551396. This includes the recent stock market crash.
Financial adviser
Look for a coach: You can buy financial products on the internet. What you should look for is a financial adviser who can help you with a holistic financial plan. You want to know where you are, where you want to be and how you will get there.
All about the business: This should be a relationship for life, not a one-night stand. So make sure your adviser is part of a financial practice that continues even if he or she is run over by a bus.
Experience vs qualifications. A certified financial planner is the best qualification in the industry, but do not underestimate the value of experience. Personal references are often the best way to find the right adviser.
The basics: The business must be registered with the Financial Services Board (FSB). There are too many stories of dodgy advisers running into the sunset with people’s hard-earned cash. Just because someone has a laptop and looks professional doesn’t mean that he or she is. The licence should be displayed and the FSB website has a list of all registered advisers at www.fsb.org.za
Go to them: The days of the door-to-door salesmen are over. Meet the adviser at his or her practice so that you know where to go if something goes wrong. A good adviser will introduce you to other staff so you know there is someone to fall back on.
Annual review: An adviser must review your financial plan once a year. Most advisers earn an ongoing annual fee through your investments so make sure they provide a service.
The full Monty: The practice should have relationships with other businesses that can provide you with comprehensive financial services, such as estate and tax planning.
Retire well
Start today: The earlier you start, the less you have to save each month, thanks to the power of compounding. For example, if you started saving R1 000 a month for 10 years when you first started working and then stopped, you could expect to have R2,5-million at retirement. If you started at age 35 and saved for 25 years, you could expect to have saved only R1,4-million.
Get aggressive: If you started saving for retirement at age 35, you will need to save more each month and you need to invest in a more aggressive fund that aims to outperform inflation by 5%. In this example, if you saved an extra R200 a month in a more aggressive fund you could expect to have a retirement fund worth R2,25-million. But higher- risk funds can lose you money in the shorter term so be prepared for a bumpy ride.
Work longer: You can double your retirement nest egg by retiring at 70 rather than at 60. This is because of the same compounding effect of starting earlier — you give your existing savings more time to grow.
Calculate your retirement: Financial educator Dave Crawford has an easy spreadsheet to calculate whether you are on track with your retirement savings at www.planningretirement.co.za.
Lift your credit score
Why it matters: Last year banks turned down 30% of loan applications because of poor debt records. Even if you get credit, the worse your record is, the more you will pay in interest. It can even affect your insurance premiums.
Take on some debt: You can’t have a credit score without debt — it is the way you manage it that’s important. A credit card is a good way to build up a credit record and it also provides an emergency fund. When you take out a credit card, sign up for the option that allows the credit provider to debit your account for the full amount each month. This will prevent you from going into debt and it will improve your credit record at the same time.
But not too much: According to credit bureau TransUnion, you need to keep repayments to a maximum of 20% to 30% of your income. If you go over this figure, it will have a negative affect on your record.
Pay on time: Always pay your accounts on time each month, even if you can pay only the minimum amount. Mark your calendar or set an alarm on your cellphone to remind you to pay your accounts. Let your credit providers know when you change address so that you don’t miss any bills.
Communicate with your credit/service providers: If you cannot make your regular payments, talk to the company concerned to see if it has assistance programmes prior to missing a payment.
Never ignore legal letters: This could become a serious reflection on your credit report.
Know your status: You are entitled to one free credit check from each credit bureau every year. Trans-Union: www.mytransunion.co.za (make sure you scroll down to find the FREE report) or Experian:www.creditexpert.co.za.