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?
10 January 2017
One of the best resolutions you can make for 2017, or any year for that matter, is to manage your finances better. Not only is this a good resolution to make, but it’s not complicated. Financial freedom, stability, and even wealth generation, can be developed over time by following a few easy maxims.
Avoid short-term debt
Debt is generally perceived as a negative thing, but this is not always the case. For example, a bond used to buy a house that appreciates in value at a higher rate than the interest charged on the bond yields a return. For those more financially astute, debt is often used to invest in stocks that yield a return much higher than the interest paid to buy them (but this should not be attempted by anyone who isn’t an expert investor!). Short-term debt, however, is bad debt. Think store cards, personal loans, and yes, even vehicle loans. At the moment you can pay up to 28% in interest on short term debt, in addition to the other fees that apply to short-term debt (e.g. initiation fees, service fees etc). In other words, debt is expensive. For short-term pleasures, you inflict upon yourself a long-term financial impediment. The moral of the story is: don’t take out short-term debt! And if you have existing short-term debt, pay it off as quickly as possible. This should be your first priority, starting with the smallest account. Then you will free up even more cash to put toward the bigger debt, and so on. Eventually, you will realise the pleasures of having additional cash flow per month, because that money is no longer going towards debt.
Everybody knows that in principal saving money is a good thing. Yet so few people actually save! To put this into perspective, on average South Africans save less than nothing. In other words, we are a nation that is fonder of being in debt than saving. Many people fall into the trap of thinking that unless they have thousands of Rands to save, it’s not worth it. But saving anything is always better than saving nothing, because in the end those little amounts add up to a lot. The real value of saving is most vivid when compared to our previous topic: debt. Let’s put this in practical terms: i you took out a R5000 personal loan over a 12 month repayment period, you could end up making repayments of around R670 per month, eventually totaling over R8000. You received R5000; you paid R8000. Now contrast this with saving. If you put R500 into a decent money market fund, you could earn around 9% in annual interest. Therefore, after 12 months you would have accumulated about R6300. The conclusion? By saving instead of borrowing, you spent R2000 less, and received R1300 more. The sacrifice? Being diligent and delaying your gratification. It is a sacrifice that quite literally pays off.
Just because you can afford something, does not mean you must buy it. This extends to our lifestyle decisions as well as to our financial planning decisions. For example, there are some people who drive to work, who could easily be taking public transport and hence saving hundreds or even thousands of Rands. Furthermore, many people are overspending on insurance policies and contracts that they could be getting at a better rate somewhere else. The internet has given us no excuse for this. A simple Google search could yield various websites that could draw up multiple quotes from different insurance providers at the click of a button. Small, seemingly insignificant steps to reduce spending all add up to huge savings. The task? Sit down and think about your budget. What do you buy, how much do you spend, and what could you cut back on? You might be surprised at how many ideas you can think of.
Make your money work for you. This is an old cliché we all know but never really heed. But the reality is, a little bit of self-discipline and wisdom makes this goal both desirable and attainable.
Regardless of whether or not your salary increases or you get a promotion, ask yourself this: will I be wealthier at the end of 2017? The answer can be yes.