How to stay solvent – even in tough times
So how do you like your economy - shaken or stirred? One good thing about the recent downturn is that it has forced us to reassess our priorities financially.
“If you look after the pennies, the pounds will take care of themselves. Spend some, but always also save some. Pay as you go; if you can't afford to pay, don't go.” . . . .Why have so many of us made the quantum leap from what our parents taught to where we are now? Especially when deep down we know that having debt is really un-cool.
Here are some no nonsense pointers to help you to stay solvent even in tough times.
A. Criteria for borrowing
Economics
Is the return greater than the cost of the loan?
Are you sure you will be able to pay back the loan?
Psychological
Do you have peace of mind about taking the loan or nagging doubts?
Unity of partners
Husband and wife or partners should be in agreement as both will suffer if things don’t work out. Also, it’s unlikely that two will make a spur of the moment emotional buying decision.
B. Strategy for investing
- Eliminate all debt
- Save one month’s salary for emergencies
- Put away 3 to 6 months salary for retrenchment, loss of job etc.
- Save for major purchases
- Plan for retirement and take out long term investments
- Only once you have taken care of points 1-5, can you afford to speculate
C. Other general tips
1. Get paid what you're worth & spend less than you earn
Being underpaid by even a few thousand a year can have a significant cumulative effect over the course of your working life. So make sure you know what your job is worth both inside and outside the company you work for – and aim to earn this.
No matter how much or how little you're paid, you'll never get ahead if you spend more than you earn. Usually it's easier to spend less than it is to earn more, and even small cost-cutting efforts can mean big savings.
2. Stick to a budget
Without a budget it’s impossible to set saving goals. Whether or not you are being forced to cut back now, if you don’t already, start tracking your spending patterns today. Knowing what you really need to survive can be liberating. You’ll be surprised at all the options you have when you're not a slave to high overheads.
Many people still use the tried and trusted envelope system to help make ends meet. This involves filling up different envelopes for every week in the month - at the start of each month - with enough cash for bread & milk, lunch money, fuel etc.
A no-frills, stay-alive budget looks something like this
- Shelter
- Basic food (Excludes fast food)
- Basic utilities (Excludes cable, mobile phone plans, and outside cleaning services)
- Transportation
- Basic debt service (Excludes extra payments on the bond, loans or credit cards)
- Education (Excluding extra mural activities)
- Essential clothing
For budget suggestions – see at the end of this article.
6. Maximize your employment benefits
Employment benefits like provident or pension funds, medical insurances, etc., are worth big bucks. Make sure you're maximizing yours and taking advantage of any schemes your company offers that can save you money by reducing taxes or after tax expenses.
7. Review your insurance portfolio
You need adequate insurance; life cover to protect your dependants, and disability cover to protect your income. But don’t be talked into paying too much for it. Insurance agents sometimes get away with adding unnecessary extra coverage to car loans and mortgages, or selling life cover to people who have no dependents.
8. Draw up or update your will
Nearly 70% of people die intestate. To protect your loved ones you need a will. And, if your situation isn't too complicated, as part of their service most insurance companies and banks have in-house legal departments that can help you draw up a will for free.
9. Keep good records
If you don't keep good records, you're probably not claiming all your allowable income tax deductions. Set up a system now and use it all year round. It's much easier than digging around for old receipts at tax time, only to find you have lost some that might have saved you money.
10. Give something back & be thankful for what you have
Most of today’s financial gurus propose that you give one tenth of your income back for the greater good. This could involve tithing, supporting a worthy cause or helping someone you know who is struggling to make ends meet.
Although it may sound corny, remember there are always others who are worse off than you. So bear this in mind and try to appreciate what you do have.
With special thanks to Eric Loynes, who runs a workshop “Managing Your Personal Finances” – in Pretoria, South Africa.
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Budget guidelines
Major spending categories (According to 2003 US Bureau of Labour Stats)
- Food and drink 14%
- Housing 33%
- Apparel and services 4%
- Transportation 19%
- Healthcare 6%
- Entertainment 5%
- Personal care products and services 1.3%
- Reading 0.3%
- Education 2%
- Tobacco products and smoking supplies 0.7%
- Miscellaneous 1.5%
- Cash contributions 3.4%
- Personal insurance and pensions 10%
