You work hard for your money so use it wisely.
Wether you earn R10 000 or a R100 000 per month the basic objective in your financial planning is to be able to maintain the standard of living that you have accustomed yourself to no matter what life changing event comes your way. It could be a death, disablement, marriage, divorce, retirement….
Allocate 30% of your income to provisions for the maintenance of your lifestyle. This includes medical aid, insurance and investments. These provisions provide safety nets should you face a life changing event. They should be able to provide sufficient financial support to maintain your monthly needs.
The investments should initially aim for the short term to build up enough to cover your monthly expenses for 6 months. A money market account is ideal for this provision. Once in place you should then allocate your savings to the medium term (5 years). A super place to invest is a tax free savings account. You could also consider unit trusts and exchange traded funds.
Now your plan is developing. You have insured yourself and your assets for any unforeseen expenses and have cash and investments in place for the next 5 years.
You will have funds in place for funds a deposit on cars, holidays, emergencies….even if you are retrenched you can carry yourself for 6 moths.
If you need to buy a house or car you are well positioned financially to afford it. The cost of your debt should ideally be below 30% of your income. So your repayments on your car and house should not exceed 30% of your earnings.
Paying off this debt sooner than later will provide you with more disposable income to either save more of or improve your standard of living. As long as you have set aside your 30% for provisions you can do what you want to with the rest.
Using your income wisely will give you peace of mind which is the ultimate benefit of a sound financial plan.
Institutions make their money by lending money to you at a rate over the time. Simply, the long you take to pay the more it costs you and the banks thrive on it.
Debt is so easy to get into and so very difficult to get out of. Prevention is always better than cure but the reality is that we get enticed into debt over time and soon find ourselves in it way too deep. The cost of debt climbs quickly and robs us of the potential to create wealth.
You can benefit by reversing the formula
Interest + time = profit
You cannot reduce the interest rate but can reduce the time = less profit for institution
Less interest for institution means more savings for you
More savings for you compounded over time = more wealth for you
Here are 3 steps to getting ahead of your debt
Coping with debt is like trying to fill up a bath leaving the plug out.
Put the plug in by making a conscious decision to get out of debt. The culprits need to be identified and cannot be allowed to increase anymore.
Credit cards, overdraft, personal loans, store accounts, even outstanding taxes. All have to stop if you want to reduce the time to pay off your debt.
Open up the tap with your disposable income. This is the money that is left over after your cost of living during the month.
Focus on living expenses. Split your expenses into ‘nice to haves’ and ‘must haves’. This is the hard work. Being honest with yourself in identifying what you need and what you can do without.
Keep a close eye on the water level. Divert the new found savings back into the debt instruments.
Targeting the highest interest bearing one first and then working through the next. Patiently keep your living expenses well under control. A new year brings on a wave of price hikes. So your cost of living will is going to increase anyway forcing you to squeeze those living expenses even more.
It is a classic case of ‘no pain no gain’, where the benefits are certainly well worth it!