The importance of savings and actively building financial security have been highlighted during the Covid-19 pandemic which has left many South Africans with high levels of household debt facing uncertain futures, says Old Mutual.
South Africans must learn from the pandemic and use the experience to change their mindsets about money. This approach will involve admitting that putting pleasure and possessions ahead of saving can both be limiting factors and having the strength to acknowledge errors is the first step needed for building a sustainable financial future, says Johan Manyike, Head of Financial Education at Old Mutual,
“South Africans have high levels of debt. Before lockdown, many people used about 73% of their regular incomes to cover ongoing debts. This means that only 27% is left to provide for living costs and emergencies. Just what can happen when the unexpected occurs has been clearly shown over the last few months. Mindsets need to change from chasing an unsupportable lifestyle to one in which savings, personal financial management and planning are regular activities.”
The steps towards financial security that need to be followed are not complicated. Tracked carefully with discipline, they can gradually improve their personal finances, says Manyike. They include:
• Creating a budget
Most people do not know how much they spend and where the money goes. List every cent spent during a month and use the information to draw up a budget. It is guaranteed that you will be surprised to find out just what is being spent on unnecessary items.
• Paying yourself first
Start immediately and deduct a defined amount of money from your salary every month and pay the cash into a separate account. This should be the first thing you do, and you should save as much as you can. Interest and then compound interest will work for you if you do not touch the savings.
Your budget will identify where you can cut and save. For instance, five cups of coffee a week at R25 a cup during 20 working days a month equals R500. Over a year, that is R 6 000.
Instead of spending a bonus or a financial windfall, put it in the savings account where it can work for you.
• Paying off debt
After you have paid yourself, taking a stand and not incurring further debt means that bills can be controlled. Getting the process underway means closing accounts that are not needed and taking disciplined steps to reduce what you owe. The steps to follow are:
- Putting aside money to pay debt every month
- Identifying the debts that attract the most interest and paying them off first
- Not reducing your ‘debt repayment ‘budget’ when a debt is paid.
- Instead of spending the money elsewhere, applying it to the remaining debts will mean that as items are paid, you will have more cash available to settle the smaller debts. These will then be quickly cleared.
• Start paying cash
Using a debit card or paying cash means you can only spend what you have. If you use a credit card and you are paying the monthly account in full, you are in control. If you use it to buy what you want, rather than what you need, you could find yourself in trouble. Make sure you do not spend money you do not have. If you want something so badly, save for it. Use credit responsibly.
• Investing correctly
As your savings mount up, investment options increase. It is wise when you can start investing to have a financial adviser help you plan. He or she will recommend on how to prepare financially for the various stages of your life by making short, medium, and long-term investments.
• Protecting what you have built up
Get advice on life insurance, estate planning and what you should be doing to ensure that if something should happen to you, that debts and loans are settled and that the balance on home loans are paid. Taking these steps now means a sustainable future for those you love.
“It is never too late to start correcting bad financial habits. With a change of mindset will come the realisation that your earning power is the greatest asset you have,” says Manyike.
“Maximising this asset means taking the time to become financially literate. The more you learn, the more likely it is that you will make sound money decisions and reach your financial goals.”
As Raphael Benza, of agency Vth Season, says in episode three of AMPD Studios Live series: “We advise our artists to invest their first cheque in new clothes because they need to look the part when doing interviews. With their second big cheque, we say take care of your debt and pay off what you can. With the next payment, buy an asset, like an apartment, something that will help you keep going.”
“Then next make some investments for the future. Invest in things like the money market or unit trusts. Investments are part of laying a solid foundation”, Benza concludes.
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