Adding a product to your personal finance portfolio, such as insurance or an investment, is a big decision. Each month it will take a chunk out of your salary, and you need to ensure you’re ready to take on such a commitment.
Justmoney found out what you should keep in mind before taking out a new product, how you can assess the products you already have, and how you can generally improve your financial position.
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When to consider a new financial product
According to Tessa Verwoerdt, head of department at the money solutions centre at Bayport South Africa, you should assess your finances at least once a year.
Before taking out a new financial product, Verwoerdt says you should first evaluate your assets and liabilities. Ask yourself how much you earn and how much you spend, what your net worth is, and how you can increase your net worth over time.
“Review your borrowing behaviour and your spending patterns. Identify the areas where you overspend and where you could start to save. Pay off debt as quick as possible,” says Verwoerdt.
“When assessing your finances, make sure you review all your investments and bank accounts, credit cards, assets, and loans. Also look at your insurance products and life cover policies, annuities, and retirement funds. Make sure you have the protection you need for the future,” says Verwoerdt.
She adds that you should look at what happened with your total debt in the previous year. Did it go up, how much have you borrowed, and were you able to save?
“The only way to get out of debt is to stop taking on new debt. It’s critical for your financial health to manage your debt properly and have control over your spending,” says Verwoerdt.
“It’s also important to know and understand your creditworthiness by looking at your personal credit score and report. This will help you to maintain and improve your finances,” she adds.
Deciding when to take out a loan
Verwoerdt believes you should only take out loans that you really need and can afford to repay monthly in line with your financial goals and needs.
“It’s important to make sure you’ll still be able to afford the payments without taking your additional income, such as overtime, bonuses, and incentives, into consideration,” says Verwoerdt.
She recommends doing your budget first and finding out how much the debt will cost you, the term of the debt, and how it fits into your long-term goals.
“After this, shop around to see where you can get the best deal for the products that you need, including insurance and saving products,” says Verwoerdt.
“Don’t borrow debt to pay off debt, unless it’s a consolidation loan which will improve your financial situation,” she adds.
READ MORE: Can you afford a personal loan?
Four keys to financial security
Verwoerdt points out that there are four important actions you need to keep in mind when working with your personal finances: knowing, planning, controlling, and growing.
Have a look at the below table to find out how you can improve your financial situation:
If you’re struggling with your finances, debt counselling might be right for you. Click here for more.