With imminent interest rate hikes and the rising cost of living, 2016 is expected to be a difficult year for many consumers financially if they don’t currently have a system in place.
Regardless of whether someone is earning R5 000 a month or R5 million, it is important to have solid financial plans in place to be able to get through the tough times and continue to thrive even when the economy is not in an ideal state.
There have been many who have lost everything because they did not understand the fundamentals regarding finances. Irrespective of the individual’s earning potential, the same principles can be used and applied to ensure that the person has a solid financial foundation.
Here are some strategies you can put in place.
Pay off debt
Take a minute to calculate how much you spend on debt payments each month. Pull out your credit card statements and other financial reports, tally your minimum debt payments, and then compare this figure to your monthly income. In a perfect world, debt payments should not exceed 36% of your gross monthly income. But if you’re spending 50% or more on debt payments each month, it’s time to make some financial adjustments.
Build an emergency fund
Put 10% of your income to Emergency fund, otherwise known as the rainy-day fund. What will you do if your car needs some major repairs? Do you have R500 to R3, 000 on hand? What if your house needs some repairs or it is discovered that you are living in a building that leaks? You can’t always count on the bank to lend you money for all of these things. It is much better to anticipate a worst case scenario and have some money saved.
The next step is to starting saving 10% of your income monthly. Unlike the emergency fund, this step is to build up a full emergency fund that covers all household expenses for at least three months, but ideally up to six months and more. In good times, everyone thinks that their job is secure, but in bad times, many begin to realize that bad things can happen to anyone. You could suddenly lose your job, your business could dry up, you might get injured—either physically or psychologically or become too sick to work. Any of these things can happen to you. Employment Insurance (EI) doesn’t kick in until you have been unemployed for 6 weeks. Do you have enough savings to tie you over or will you be living on credit? Living on credit during a time like this can quickly make a bad situation worse. Minimum payments become higher and higher until they are unaffordable and credit limits no longer budge. Then when you finally do get some income, what used to be enough doesn’t get you by because you have all these new debt payments to make each month. So now you actually need more income than before because you’ll need to pay down these debts and eventually work to get them paid off.
Save for retirement
Another important reason to save money is your retirement. The sooner you start saving for retirement, the less you will have to save in the future. You can put your money to work for you. As you continue to contribute overtime you will be earning more interest on the money you have, then you put in each month. You should at least be contributing up to your employer’s match and eventually you will want to contribute ten to fifteen percent of your gross income.
There are huge emotional, psychological and physical consequences to always living stressfully, from hand to mouth, pay cheque to pay cheque. People who don’t plan for their future seem to run from “crisis” to “crisis.”
There is a little known truth that happiness can come from being organized. Being organized isn’t going to make you happy all by itself, but it can sure help. There’s so much in your future that you don’t have control over, so putting aside some money to spend when you need it is actually organizing and taking control of your future and financial affairs. You have nothing to lose by saving – and only a happier future to gain.