A six part financial check up.
We all know that any time of the year can be used to make lifestyle and budgetary changes. However, whatever you think of book ending a year around a calendar period (12 months of 30 days) first conceived by the ancient Egyptians, our new year brings a collective mental freshness and a new resolve that should not be wasted. What better time to review your financial health?
1. Track your spending patterns.
Management boffin Peter Drucker is attributed with saying ‘… you can’t manage what you don’t measure.’ Recording daily expenditure is the rule number one of taking control. Make a habit of keeping a diary of your expenses. Can you answer any of the questions below?
- How much do you spend on petrol relative to a year ago?
- Is there a downward trend on your eating out budget?
- What impact will e-tolls have on your monthly expenses? And what are you going to cut out to compensate for this expenditure?
- What proportion of your income is being spent on insurance relative to three years ago?
Writing down every cent you spend over the course of a month will give you a very clear picture of exactly how you spend your money. This information will equip you to decide what you can cut down on, and where you can save. It is a good idea to track expenditure levels and trends on a spreadsheet; this will give you a good idea of long term trends. Repeat this exercise from time to time to make sure that you do not lose touch.
Some tips
- Put yourself in the shoes of a retailer. What tricks would you apply to make your customers spend more? Tempting foodie treats near the cash out tills? Special offers near the door as you walk in? If you are alert to these retailing practices, you can brace yourself to resist.
- What about leaving your credit card at home when you go shopping? Researchers tell us that shoppers are more reluctant to spend their cash than swiping that credit card. It hurts more.
- Insurers are facing stiff competition and are able to discount premiums to good, low risk customers. Make sure you are getting the best possible deal from your insurer.
2. Get out of debt. Pay off expensive debts first.
We all know that credit card debt, store credit and unsecured loans are expensive, but for many of us, these expensive loans do not stop us from living beyond our means.
The results of the Unisa Consumer Financial Vulnerability Index (CFVI), which is based on data supplied by FinScope data, showed that as of the third quarter of 2013, South Africans across all income groups were vulnerable to default when servicing existing debt.
The most vulnerable group were those earning less than R6 000 per month. But the graph below shows us that there is not necessarily a strong correlation between income and high exposure to default risk as incomes improve. In the R12 000 to R16 999 group, 17.8% were exposed to default risk and in the R25 000 to R29 999 group, 16.5% were exposed. On the other hand, the R25 000 – R29 000 group also had the highest proportion of debt servicing secure (66.2%) and the smallest proportion of debt servicing exposed (17.2%) consumers.
Bottom line? People of all income groups should avoid credit and getting into debt. If you find yourself in trouble, take advice from a registered debt counsellor.
3. Commit to saving more this year.
We know that this will not be easy. Many middle class South Africans take responsibility for the financial well being of both their children and their parents. Furthermore, the haphazard quality of government provided education, health and security prompts many families to pay private providers for these basic services with after tax income, further eroding savings. Additional expenses such as e-tolls and higher petrol prices also have to be taken into account.
In addition, the state of the economy is worrying. The results of the Unisa Consumer Financial Vulnerability Index (CFVI), which is based on data supplied by FinScope showed that the majority of South African consumers were struggling to balance their finances in the third quarter of 2013. The authors of the study did not expect any immediate or significant improvement in South African for 2014.
The graph below shows that 40.5% of top earners, those earning over R40 000 a month consider themselves ‘exposed’ to financial vulnerability.
The Unisa study also analysed financial vulnerability in different educational categories. The graph below shows an alarming uptick in the vulnerability of even the most educated category, as measured in 2012 and 2013.
So how much should you save? It is not easy to come up with a blanket recommendation; health, employability, the possibility of inheriting money and other factors all play a role.
A word of warning: be wary of using international guidelines on how much to save. Many of the developed countries offer state provided quality health care and pensions to middle class citizens that are simply not available to middle class South Africans. In the United States, for example, all Americans are eligible for state provided health insurance (Medicare) at the age 65. The 10% savings rule suggestion on many United States websites thus assumes that Medicare and other safety net services are state provided.
4. Separate your day to day bank account from your savings plans and automate your investment process.
Successful investors set up banking systems so that a pre-determined sum of money is sent from a current account (the account into which your salary is paid) to a savings account. Money is the savings account usually attracts a higher rate of interest, before being invested in a vehicle of your choice; an exchange traded fund, a unit trust or even directly into shares.
5. Educate yourself about the investment process, the risks and the associated costs.
The more you understand about the investment process, the choices available and risks involved, the more comfortable you will be investing.
There are lots of good books you can read to start off your personal financial literacy programme. Look out for ‘A Random Walk Down Wall Street’ by Burton G. Malkiel or ‘Investing in an Uncertain Economy For Dummies’ by Sheryl Garrett.
Find out about the benefits of diversification, the importance of keeping costs low, taking appropriate risk before your talk to a financial advisor, so that you are at least familiar with some of the language and concepts. Educating yourself about the markets and investing is a lifelong process; you will find that the more you know, the more you will want to find out more.
Many people prefer to use the services of investment advisors to help them make appropriate investment choices. If you decide that you need help, choose a financial advisor carefully and be aware of the costs of all services offered.
6. Track the performance and costs of your existing savings and investments.
One of the most important aspects of investing is the review process. Over time, your circumstances change, your investment needs change from a requirement for capital growth to a need for income. In addition, more competitive products are offered by the investment industry, sometimes at a lower cost. Fund managers of previously outperforming unit trusts emigrate or retire. A changing investing environment may encourage you to be either more aggressive in your investment risk or less aggressive.
As an investor, you have to actively monitor where your money is actually going and how much you’re paying for investment services. A percentage point in returns or costs can make a huge difference to a 40 year investment. Mindfulness is everything.
References: To access the complete Unisa Consumer Financial Vulnerability Index (CFVI) referred to in this article; please click on the following link:
http://www.unisa.ac.za/contents/faculties/ems/docs/CFVI%20Q3%202013%20Brochure.pdf