Be a finance minister at home

Tendani Mantshimuli, consumer economist at Liberty Retail South Africa, says running your household on limited funds is not unlike managing a country’s budget.

The national budget isn’t really that different to a household budget. Balancing income and expenditure from a limited tax base isn’t unlike running a home, where a carefully structured budget can make all the difference. Here are some tips for “finance ministers” at home.

  • Begin with a budget
    Know how much income you have and the value of the bills to be paid.
    Then prioritise how the money will be spent. There’s always a limited amount available for financial commitments, necessities and luxuries, says Mantshimuli, so apportion your money carefully.
  • Manage debt
    “The government, like many households, has to pay for its debts and this forms part of the budget,” says Mantshimuli. “For the next financial year, 15% of the budget will be spent on debt costs. Since 1996, when Trevor Manuel became finance minister, South Africa has worked hard at reducing its debt levels. The total debt owed by the country fell from 49,5% of GDP in 1995 to 22,6% by 2008. The result is that less of the budget is allocated to paying off debt which means that more is available to spend on areas like education, health and infrastructure.”

    The key here is focusing on reducing debt. Your debt repayments should ideally be not more than 25% of your monthly income and should never exceed 30%. Make sure you have a good credit record, which will put you in a stronger position if you face a financial crisis.

  • Save for emergencies
    Mantshimuli points out that during our period of strong economic growth, the finance minister ran a budget surplus rather than giving in to the temptation to blow the country’s entire income. Government spent less money than it received, creating a buffer for when economic conditions changed.

    Due to the financial crisis, South Africa is now running a budget deficit as tax revenues have fallen. The deficit is still manageable, though, because of our low overall debt levels. Government has been able to borrow money at very favourable rates. The minister stated that it is important to use good economic times to boost savings.

    Mantshimuli says your budget needs to factor in emergency savings as you never know when your financial situation will change. She says you should try to put 5% of your income into a money market account each month. And make a point of increasing your savings while interest rates and debt repayments are lower.

  • Save for the long term
    Government’s role is not to save money for the long term as that money is better spent in the economy. However, expenditure on infrastructure can be seen as a form of long-term saving.

    Economists estimate that for every R1 the government spends on infrastructure like roads and telecommunication, the economy receives about R2 in economic benefit. Mantshimuli says this is unlike other areas of spending, such as health and social grants, which bring immediate relief but which do not build long-term wealth.

    “Apart from meeting your day-to-day expenses, you need to include long-term savings that can grow and provide you with an economic benefit in the future,” she says.
  • Maintain discipline
    “If you think you face pressure to spend money, imagine being the finance minister! Every government department would like more money and there is a great deal of political pressure to loosen the purse strings,” Mantshimuli says.

    The National Treasury requires departments to submit their own budgets and to be accountable for the money that they are receiving. According the minister he received budget requests from the departments totalling R1,3-trillion! That was R350-billion more than the total budget—he has to know when to say “no”.

    How does this work in the household? Well, when your children demand an iPhone or PlayStation, suggest they budget for it out of their pocket money. Don’t use debt to fund luxuries—budget to spoil someone. That way, they’ll appreciate the purchase so much more.

- Mantshimuli is also a former Reserve Bank senior economist.

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