Category Retirement
SUB CATEGORIES Annuties |  General |  Savings & Investments | 

Lessons from our Finance Minister on how to manage our finances

14 March 2013 Nico-Louis Minnie, Liberty
Nico-Louis Minnie, Head: Wealth Management Platforms, Liberty

Nico-Louis Minnie, Head: Wealth Management Platforms, Liberty

We can draw lessons from the national budget to apply to our own household budgets, not least of all because every year the Finance Minister walks a tightrope between income and expenditure. Meeting the needs of all South Africans from a very limited tax

Step one: How much do you have?

The Minister begins his budgeting process by estimating what income he can expect from taxes. This is based on last year’s tax revenue which he adjusts upwards to accommodate for inflation-linked salary increases. He will also adjust the figures based on whatever tax relief or tax increases he introduces.

A household also needs to start by understanding how much they have to live on. This is fairly predictable for a regular salary earner, however people living on commission or less regular income need to make projections in much the same way as the Minister.

Step two: Draw up your wish list

Minister Gordhan receives budget requests from all the departments stipulating what they would like to spend for the year, within reason. This gives him an idea of the demands he faces.

As a household you need to decide what you would like to be spending your money on this year.

Step three: Compare and prioritise

Like all households the Minister is faced with financial constraints. You cannot go to your employer and ask for a higher salary based on your spending needs; the Minister is limited in how much tax he can raise without putting too much strain on taxpayers.

The Minister therefore has to prioritise spending. Government priorities are around social spending such as social grants, housing, education and health, however the Minister will also always ensure that there is money going into long-term infrastructure development. Due to under investment in infrastructure by previous governments, this has become a major priority.

Households have to spend money on basic needs such as groceries, electricity and water. They need to spend on housing and putting money aside for children’s education and medical emergencies. But like government, it is important to also be putting money away for long-term needs such as retirement. If you have underinvested in retirement you may need to increase the percentage of your budget that you allocate to savings.

Step four: Find savings

Minister Gordhan always speaks about improving efficiencies in government spending; households need to get clever about finding ways to cut costs.

Apart from taking advantage of tax incentives to save, make sure you are using your reward programmes effectively. For example; a gym membership through Liberty’s Own your life Rewards programme will save you R4000 a year. If you use the lifestyle discounts you can save 10% on eating out or air travel. Make sure you are fully utilising any reward programmes offered by your bank or local supermarket.

Also get clever with day-to-day expenses. Reduce your bank fees, get involved in a lift club, shop around for better short-term insurance premiums, buy loose rather than pre-packed fruit and vegetables. There is a lot of wastage in our budget. By focusing on efficiency we can have more money to spend on things that really matter.

Step five: Allow for flexibility

There is always some major expense that government has to provide for each year, whether it is funding for Eskom or unexpected funding for toll roads.

Households need to work big expenses into their budget and also prepare for unexpected costs. Is your car due for a major service? Do you need to buy a new fridge? Have you budgeted for school uniforms?

You can plan for foreseen events but you also need to have a contingency plan for the unexpected. Make sure your budget includes putting money away each month for emergencies. These funds should be invested in an accessible account that you can access within 24 hours. Ideally you want to have three to six months of expenses in an emergency fund. It may take you a few years to get there, but start by aiming for R10 000 to provide a buffer against day-to-day emergencies.

Step six: Get help to stay committed

In 2010 the South African National Budget was rated as the most transparent budget in the world according to International Budget Partnership (IBP), an organisation that measures the transparency of government spending.

The benefit of transparency is that everyone knows the promises you have made and can monitor you. The more transparent a government’s budget, the more eyes are on them and therefore the more accountable they have to be.

Discuss your budget and your financial commitments with your partner or financial adviser. Ask them to keep you accountable so when you have the urge to splurge you know you will have to answer to them.

Step seven: Reward yourself

Every year the Minister announces some relief for taxpayers. When times were good and tax revenues were higher the tax relief was significant; but even in more difficult times there is always room to reward those who contribute to the country’s resources.

Set yourself a financial goal and when you reach it make sure you reward yourself. It may be that you are able to allocate a little bit more to entertainment; it could be enjoying that daily cappuccino knowing that your savings are on track; or using some of your bonus to have a fabulous holiday because the rest of your finances are in order. A well-managed budget should always have something in it just for you.

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