Being over-indebted has a negative impact on your personal finances. It reduces your credit score, absorbs your disposable income, and prevents you from building your savings. Added to this, it also has an impact on your emotional well-being. Being over-indebted can contribute to a string of psychological issues, such as anxiety, loneliness, and depression. It […]
9 December 2014
Plan for Jan
With the end of the year drawing near, most South African businesses shut their doors for the festive season and give their employees some well-deserved time off. Much time is spent reflecting over the year that has passed and we dwell on the good times and the bad, but how many of us actually start looking ahead and planning for the New Year?
It’s never too late to plan for Jan!
Whether it’s business planning, personal growth planning, education or studying or financial planning, it is usually a good idea to have some sort of plan of action in most, if not all aspects of our lives.
A solid plan allows us to foresee certain challenges, create specific goals and measure the success or failure of this plan along the way. With no plan we merely meander towards a vague target with unknown timelines and particulars.
Anybody that earns some form of income should be planning. When you know how much you earn and what type of expenses you have, you should start by creating a budget.
Budgeting – The best way to plan for Jan
At DebtBusters, most of the consumers that contact us have never drawn up a proper budget and live every day from hand to mouth. It is very difficult to track all of your income and expenses and how much money you have left in your head, and it is advisable to make this information visible.
Here is how you can draw up a budget:
1. List all your sources of income
Look at your payslips, receipts, bank and account statements to gather all the information.
2. List your monthly expenses
Your expenses include everything from necessities to luxuries. Divide your necessities into fixed expenses, those that stay the same each month like rent, and variable expenses, those that change every month like groceries.
An emergency savings fund;
An emergency savings account is also included in expenses. It is important to put in provisions for emergencies, as it will prevent you from being caught by surprise and having to borrow money or short pay on accounts to cover emergencies.
Make provision for expenses that do not occur each month;
It is also important to make provisions for expenses that do not occur each month. Most people do not include things like clothing or vehicle maintenance in their budgets. For example: Your vehicle needs a R3000 service every 12 months. Therefore R250 needs to be put aside each month in order to pay for this service. If you spend all of your money each month and all of a sudden this service pops up, naturally consumers would go out a shop for a loan to pay off the once-off expense.
Even though you may only occur these costs every three months or maybe once a year, you still need to provide a monthly provision for this expense and keep that money aside in a small savings pot or deposit account.
Monthly debt repayments are also considered as an expense;
Remember, you need to include your monthly debt repayments in your budget. You can then total your monthly living expenses (Rent, groceries etc.) and your monthly debt repayments together.
3. Total your monthly income and expenses
One you have totalled both income and expenses, you need to deduct your expenses from your income.
If your income is not enough to cover all of these monthly expenses, then you are more than likely over-indebted, which means you need to make changes to your budget to make sure you have enough money to get through the month and do not overspend! This can be done by cutting down on luxuries and reducing variable expenses.
4. Review your budget on a monthly basis
It is important that you review your budget on a monthly basis, particularly just before pay day, to see how well you have managed your money. If you are struggling to make ends meet, you may want to consider visiting a debt counsellor for some expert advice.
5. Stick to your monthly budget
Once you have calculated your monthly budget and feel that it is reasonable and achievable, you can start looking forward to sticking to it and reviewing it on a monthly basis.
It is important to share your budget with the household if it affects them or you are sharing certain expenses with someone else. It could be a good exercise to plan your budget with your partner or get the family involved. Talk about saving water or electricity and not wasting food for example.
What happens when you don’t budget?
The typical over-indebted consumer does not plan for the upcoming month or year. They usually follow a simple spending cycle. They get money, they spend the money, and when it runs out, they go out and borrow more, until they get paid and the cycle starts all over again. This is a very dangerous cycle and often results in poor-looking credit reports and a hefty interest bill, which means the cost of borrowing the money continues to grow.
The cost of credit is often overlooked by borrowers as receiving the money today is more important to them than the cost of borrowing the money tomorrow hence at DebtBusters, our consultants spend lots of time educating these clients and explaining the consequences of borrowing large amounts of short-term unsecured debt.
Where this “debt spiral” starts to become extremely dangerous is when the consumer starts borrowing debt in order to settle or pay off other debt, which is known as “borrowing from Peter to pay Paul”. At the time consumers see this as a great way to keep up to date with payments as they feel that nothing is falling behind, but essentially they are become more and more over-indebted with each new loan.
Consumers approach Debtbusters when they feel a bit strapped for cash and we conduct free financial assessments with them, which involves looking at their debt repayments, monthly income and their living expenses.
Often, we see that the consumer only needed some good budgeting advice and we send them on their way. If they have tried drawing up a budget before, we often find that is has been poorly completed and unrealistic.
Nevertheless, if you have never budgeted before, we strongly recommend that 2015 be the year to start! You will feel more in control of your finances and not be in a state of shock come month end!
Author: Damon Sivitilli (DebtBusters Financial Consultant)