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Last week was the conclusion of this year’s Absa/City Press Money Makeover Challenge. The boot camp is a highlight in my calendar, as it demonstrates the power of financial education to change lives.
The insight I took from this year's experience was the extent to which people struggle to plan for money events. I have had many conversations with people outside of the challenge and I see a similar trend with anyone who is struggling financially.
People with lower incomes who plan properly are more financially secure than those earning higher salaries but are failing to plan.
Calculate your essential spend
Many people do not budget for their monthly financial obligations. A simple change in behaviour transformed Money Makeover candidate Sandra’s entire financial situation. On payday, she would have the feeling of “wealth” as her salary hit her account and she would spend the money on treats for her and her daughter. Then, halfway through the month, she would run out of money for groceries and fuel, and end up using her credit card for those purchases.
READ: Money Makeover | The journey to financial freedom starts here
The solution was simple. Sandra tracked her spending over a month and identified how much she needed for essentials such as groceries, fuel and her daughter’s nappies. She made sure all her debt obligations were met and bought all the nappies and non-perishable groceries she would need before spending on non-essentials.
As she knew what she spent during the month, she made sure to keep some money to pay for fresh groceries and fuel so there would not be a need to rely on her credit card. Nonessentials can still form part of your spending plan, but they have to be exactly that – part of a plan.
Plan for annual expenses
Another budgeting error people make is around quarterly or annual costs, such as school fees. I was speaking to a friend who admitted that she goes into overdraft every three months when her daughter’s school fees are due.
This is a financial obligation she knows she will have, so she can plan for it. She is now dividing the total cost of school fees for the year into monthly amounts and saving that each month. This gives her a much better understanding of her true financial obligation and it means that, when school fees are due at the start of each term, she has the money available.
We can apply this for all “lump” expenses such as holidays, car maintenance and even expenses such as regular medical bills or beauty spend at the hairdresser. If we allocate money each month towards these items, we would have a better idea of our living expenses and save ourselves a lot of money on not paying interest on credit cards and overdrafts.
How to save rather than borrow
The payday/ emergency loan
If you borrow for fewer than six months, the microlender can charge up to 5% interest a month, which works out to an annual rate of 60%.
They can then include an initiation fee, monthly service fee and credit insurance.
So, if you borrowed R10 000 for four months, you would pay back:
. R1 430 in interest;
. R1 150 initiation fee;
. R276 in monthly service fees (R69 per month); and
. R180 in credit life premiums (R45 per month).
Your monthly instalments, including all fees, would be R3 258, paying a total of R13 032 over four months. That loan cost you more than 30% of what you borrowed.
READ: Money Makeover | Tax and multiple incomes
Action
You can start your own emergency fund by allocating a portion of your monthly budget towards emergencies. If you support extended family, rather than being an ATM, discuss what expenses they will be incurring that year and how much you are prepared to commit towards those expenses. And then save towards it in your contingency fund.
How to save
The holiday/ lifestyle loan
If you took out a one-year loan, your interest rate would be lower as longer-term unsecured loans are capped at 27.75% per annum. But, even if you qualified for a 16% rate, the impact of the fees would still result in significant cost.
If you borrowed R10 000 over 12 months, you would pay R1 190 a month, paying back a total of R14 280 (42%) of what you borrowed. The longer you borrow for, the more it costs.
