Nicolette Dirk, finance writer, Justmoney.co.za
February is National Budget month for South Africa and two weeks from now Finance Minister, Pravin Gordhan, will disclose the state of the country’s financial situation. From the speech we should expect some belt-tightening measures for consumers and possibly an increase in the so-called sin taxes.
According to Niel Fourie, Public Policy Actuary at the Actuarial Society of South Africa now is an opportunity for consumers to buck-up on their budgeting skills.
Since the beginning of the year consumers had to deal with a 0.5% increase in interest rates and another steep increase in the fuel price. The country’s leading economists predict a tough year ahead with further interest rate hikes and price increases on the cards.
“But just as Finance Minister, Pravin Gordhan,(pictured) and his team use the National Budget to maintain the financial stability of the country, you can use a budget to ensure financial survival for you and your family. All you need is some time, honesty and a huge dose of self discipline,” said Fourie.
How will a budget help you?
Fourie says a personal budget will help you take honest stock of your financial situation, identify spending patterns and determine a plan to help you spend less, settle debts and save more.
“Without a budget you are likely to reach the end of the month wondering why all your money is gone and yet you have so little to show for it. With a solid budget in place you will know exactly where all your money has gone. You may even be able to free up some money to repay debts faster or to save and invest,” said Fourie.
He added that budgeting is not about highlighting what you cannot afford, but rather about identifying spending priorities that are worth every cent of your hard-earned cash.
Only once you have listed your earnings and your expenses, will you have a clear picture of your financial situation. You may discover, for example, that you are paying subscriptions for services that the family no longer needs or values. You may also be shocked by how much you pay for entertainment, alcohol, cigarettes and take away meals every month.
With this budget exercise you could be able to save, say, R500 every month and you increase your bond repayment by that amount. You may be able to cover the recent interest rate hike with money you did not have at your disposal anyway.
If, for example, you are servicing a mortgage bond of R1 million over 20 years, your monthly repayment at an interest rate of prime plus 2% would have been R10 000 until the interest rate increased by 0.5% at the beginning of February. After the increase your repayment would have increased by R300 to R10 300. This means that a R500 saving as a result of your budgeting exercise would not only cover the increase, but also help you save interest over the long term.
Get rid of debt
Fourie says since there is a very real probability of further interest rate increases this year, consumers servicing debt would be wise to reduce debt as quickly as possible.
“Short-term debt like credit card and retail card debt is very expensive. What many consumers don’t know is that if you buy on credit the effective interest rate you will be paying is likely to be more than double the quoted interested rate when factoring in fees and other costs,” said Fourie.
If you are in the fortunate position of being debt free, use your budget to identify areas of wasteful spending. Use this money to save towards an emergency fund and invest for a long-term goal such as your retirement. If you can save some money every month you are actually benefitting from the recent interest rate increase.
Fourie added that successful investors invest first and spend what is left of their income, while those who spend first rarely get to invest the amount required to meet their long-term goals.
Here are some tips to make the budgeting process easier:
• Allow yourself some flexibility within your budget. If your budget is too rigid you may become disillusioned.
• Getting the buy-in from your family will make it easier to achieve your budgeting goals.
• Unless you are drowning in debt, spend some money on yourself and your family. But make sure to include this in your budget.