Dawie Roodt, Chief Economist at the Efficient Group, relates a story from many years ago, before he acquired all of his current financial wisdom.
“My family and I, went on holiday without planning or saving for it. The whole trip was put onto my credit card and every day I swiped a little more knowing full well that I couldn’t afford to do this. That’s when the monkey started to visit. Every night he would sit on my shoulder and pull my ear. Why? Because I did not have the stomach to face the financial consequences of this behaviour. It was only when I finally put a stop to this pattern that the monkey went away. It was also the moment when I knew I had a grip on my finances.”
Of course the monkey isn’t literal, but is representative of how being out of control of your financial spending is likely to keep you awake at night and elevate stress levels. And now here is Covid-19, to further exacerbate that guilt, adding layer upon layer of concern about survival.
“We are going to see the economy contract by some 10% this year,” says Roodt. “The average South African income will fall by 15%, which is a serious knock. That is the crisis South Africans are currently facing … some people will lose a bit more, some will lose a lot and some will lose all of their income. And if you don’t know exactly what your financial status is, down to the last cent, inclusive of what you owe to whom, and how you are going to pay those debts, you are in serious trouble.”
Assuming you don’t really know that detail, that you have a monkey on your shoulder pulling your ear, and you feel some desperation, all may not be lost. It starts with spreadsheets - tangible black and white evidence of your current financial status, a budget in other words; and this is something that is not done by you alone, it evolves the entire family, inclusive of your little 5-year old.
There are three very important lists that come into play at this point.
1. The dream list
“Taking the first step to financial freedom means you need to acknowledge that you live within a structure, and that structure is family,” says Roodt. “As a family there are dreams and plans, be that a nice car, acquiring a degree, even a holiday. So before you put down any numbers, you need to devise a family plan. This is a dream list, where every member of the household expresses what they’d like to achieve or have, which will ultimately have a cost to it.”
The dream list is not necessarily monetary. It’s about where you want to live, what you want to become, and it’s a think BIG scenario. Even your toddler can contribute, don’t ignore their desires, this is about unity of family.
“Once you know your broad aims in life, you can put numbers to them, and if you are serious about achieving these goals, you’ll ultimately need to start putting money away. But, and it’s a big BUT, you need to be realistic … you also need to live in the meantime.
2. The income list
The next spreadsheet is a list of all the income of the family, be that salaries or interest you might receive on a daily basis.
3. The expenses list
This is obviously the biggest list of all, and itemises all the expenses that you are obliged to pay each month. Such would be your bond, council bill, education expenses, car loan repayments, insurances and of course food and consumables.
“You need to prioritise which are the most important bearing in mind that the least important does not necessarily mean they are not important - they are perhaps just not financially within reach … yet.”
Comparing the three lists
When you compare the income and expenditure lists with one another, and include the figures from the dream list - they will be completely out of sync. “You will see a seriously big number, that being expenses, and a much smaller number, obviously your income,” says Roodt. “Somewhere these have to balance up and that’s why a budget is absolutely crucial.”
The expense list is obviously where you run out of money, so ideally it must equal your revenue or income. This is the point where the family needs to be involved. You need them to understand what you are all working with, and that if everyone’s dreams or goals are to be reached, strict discipline is required. Every individual in the household needs to buy into this.
And this is a process that needs to be repeated at least twice a year, advises Roodt, because of changing circumstances. Dreams also change as realities kick in, income may increase or decrease, loans such as the bond or car will also be lower over time and/or as you pay them off, and of course new, unexpected, expenses may need to be added.
Catering for the unforeseen
Right now, during the Covid-19 pandemic, most of us are realising how the ‘unexpected’ has some serious consequences on finances, which is why there should always be a percentage of income that is put aside every month, and prioritised in the top margin of the expense list. Ideally this should be 10% of the household income and considered a normal expense.
“Over a one-year period, this will give you roughly a full month’s income buffer,” explains Roodt. “When you reach that point you may want to continue until you build enough fat for three months, or you might want to remove it from the list entirely so that you can start saving for something else. It is absolutely imperative though that you don’t touch that money and use it for frivolous things. If you are disciplined, you may consider putting it into your credit card, but if not, you should put it into an investment or savings account for a time when circumstances are dire.”
How to trim the expenses
Every expense must be scrutinised intensely. When the family is involved and they collectively understand where every cent is going, there is a realisation that some purchases may not have been entirely justified. Having this awareness means they may question when they next want something; whether it is essential or not.
Also look at the interest rates you are paying. Ask yourself whether you can get a better rate elsewhere, can you pay it off, or can you renegotiate with the creditor. For example, if you are working from home, your car is being used less and therefore the insurer may consider reducing your premium.
Bond payment holidays
Payment holidays on a bond however, should be acted on with caution. Roodt says that all those really do is change the payment term but you will still be obligated to pay the interest over the ‘relief’ holiday. “If you really are in trouble and cannot do without taking that relief, especially if it is just a matter of cash flow, don’t squander it on another expense, or ‘current expenditure’ item.
‘Capital’ vs ‘Current’ expenditure
Current expenditure is money you spend that is gone forever. Capital expenditure is however an investment in the future and applies particularly to the home loan. For example, if you pay your mortgage regularly, you are investing in a capital asset from which you will derive benefit in the future. “Even if you are only paying the interest initially, you still have a capital investment. This has to be understood, and applies to any type of loan,” says Roodt.
He provides an example: “If you borrow R100 from a friend and you buy groceries with it, you still owe the R100 and any relative interest. If however that R100 is used to acquire an asset, when you pay back the loan, you still have the asset, and, if you pay it back quickly, you save on any interest. In other words, you should only borrow long-term money to buy long-term assets. You should never borrow long-term money to spend on current expenditure; it destroys the capital value of the loan.”
Credit card and consolidation of debt
Credit cards prove this point, but only if you do this one thing: pay it off to zero every month. “It’s a valuable ‘loan’ tool in the short-term,” says Roodt. Credit cards come with numerous rewards, but if you are using it for groceries, and not zero-ing it at the end of the month, you owe for the groceries you have consumed, and worse you are still paying interest on something that no longer exists.
“It is a good idea, if you are able, to consolidate your debt because it is easier to manage in one place, especially if it is a ‘fixed’ debt basket, like your bond for example. But be warned that if you are including ‘little’ accounts (e.g. clothing or pharmacy accounts) there are all sorts of hidden costs which you should be aware of, such as interest rates, and fluctuating usage. If you don’t understand those, you can’t manage your debt basket efficiently.”
Best personal budget advice
“Keep your job, don’t demand excessive wage increases, and have a good cash flow,” says Roodt. “Your first priority must be to protect your source of income. And never under-value the value of a registered and reputable financial advisor.
“Many don’t realise that even in the worst of times, these are very skilled individuals that can save you a lot of money, often more than they cost to employ. They earn their fee from any investments they make on your behalf so they may not necessarily be a cost to you. Make sure however, you do your homework and only use a registered financial consultant, and one that is under the umbrella of a reputable company.”