Statistics suggest that the majority of South Africans spend more than they earn, that we’re a nation up to our ears in debt – and that we’re in dire need of some decent budgeting skills
WORDS: MARANA BRAND – IMAGES: SHUTTERSTOCK
If the lockdown has taught us anything, it’s the importance of sticking to a budget and having emergency savings available should the unforeseen happen. This can be challenging for those whose credit extends beyond their monthly earnings, says Adrian Goslett, regional director and CEO, RE/MAX of Southern Africa.
A recent survey by debt counselling company Debt Rescue among 1,000 SA consumers, found that 85% needed help either financially, emotionally or both because of the pandemic. A further 55% of the respondents required financial help, but had no access to credit, and 96% were stressed about health, finances or both.
DebtBusters, a company that helps consumers restructure their loans, found that the 1,6 million residents who took advantage of payment holidays offered by financial institutions during the lockdown from April to June, will pay an additional R20,7bn in debt.
“In a country as over-indebted as South Africa, especially at a time when the economy is contracting, this is enough to push people who were just about making ends meet into a situation where their debt-to-income ratio is unsustainable,” Benay Sager, CEO, DebtBusters, says.
Neil Roets, CEO, Debt Rescue, adds that an alarming number of consumers cannot repay their debt and the extent of their indebtedness has grown substantially compared to the same time last year. “The most worrisome of all is the fact that we’re now seeing the top earners on the ladder such as doctors, lawyers and corporate executives knocking on our door to place them under debt review.”
Expensive short-term loans
According to a recent survey by fintech platform PayCurve, almost 80% of the more than 500 respondents seek expensive unsecured, short-term loans to help them meet their monthly financial obligations, while 11% spent more than half their monthly income paying off short-term debt (store cards, credit cards, short-term loans etc).
Budget, budget, budget
Suffice it to say that it’s imperative to take the time to draw up a decent budget, not only to stretch your income and cover what needs to be covered, but also because you may be surprised how much money you waste and how much you can save.
One of our biggest – and most important – monthly expenses is housing, whether renting or paying off a bond. As an affordability rule of thumb, one should not spend more than 30% of one’s monthly gross income on housing, says Goslett.
This way you ensure you have enough budget to pay for other living expenses including transport, food, education, medical care, insurance and other essentials. “This should also allow you to still have some money in the bank for savings each month,” adds Grant Smee, MD, Only Realty.
Saving is imperative when it comes to owning a home. “A burst geyser, plumbing or appliance issues, special levies and perhaps a non-paying tenant are just some of the unforeseen costs that could arise at any time,” he says.
That’s where a decent budget comes into play.
If you have created a budget, you know exactly how much money you have coming in and how much is going out. You can make some plans concerning those big expenses. But if you don’t have a budget, you probably don’t have a very good picture of your finances. You may also be tempted into borrowing more money. It’s definitely better in the long run – for you and for your money – to have a budget.
Plan of action
A good place to start budgeting is by looking at your income. By knowing just how much money you’ll have coming in every month, it will be easier to know how much you’re spending. The more realistic you’re about each of these numbers, the more likely you will be to stick to your budget.
To help homeowners and tenants create a monthly budget that will reduce the risk of losing their home owing to unforeseen circumstances, RE/MAX of Southern Africa suggests becoming financially prepared for the unexpected by doing the following:
1 Categorise your expenses
If money is tight, differentiating between your needs and wants can help you stay within your budget. Needs come first, and if there’s money left over, only then can you spend money on wants.
The first step in budgeting is to find out where you’re spending your money. To do this, look at your bank statement to create a list of all your expenses and then break the expenses down into the following categories:
- Fixed essentials: these include rent, insurance instalments etc.
- Variable essentials: these are variable costs such as groceries and petrol
- Inessential expenses: these include entertainment spending and shopping sprees
- Long-term savings: payments towards pension funds and investments
- Short-term savings: informal savings such as stokvels and emergency funds
2 Cut back to save more
If you aren’t already putting away a healthy amount into savings, then you’ll need to cut back somewhere. Variable essentials and inessential expenses are the easiest areas in which to cut back to make more funds available for your savings.
Cutting back on fixed expenses like housing, on the other hand, usually involves doing some research to find cheaper alternatives and the consequent process of switching or cancelling the expense.
Whether you own or lease a property, sub-letting is an option to help cover your costs during difficult times, says Smee. “Renting out unused space such as a garage for storage or an extra, unused bedroom can help to generate cash flow and cover the cost of utilities. If you’re renting, be sure to get permission in writing from your landlord prior to subletting any portion of the property”.
In other cases, particularly for tenants, Smee says that depending on your lease agreement, there’s the option to terminate and scale back. “Consider the current economic environment we find ourselves in and take a look at your immediate environment – perhaps you’re paying for space or amenities (like those in an off-plan development) that you’re not making use of but are paying a premium for. Shop around to compare.”
National Debt Advisors (NDA) suggests that cutting back on bad habits like alcohol and smoking can be considered to have more money available for your other expenses or for savings.
3 Set savings goals
Setting savings goals is vital and these should be included in your budget as an expense. Determine an amount that you would like to put aside each month that will help you afford the various expenses incurred when owning a home.
A good rule of thumb is to have two to three months of your salary saved in a readily accessible account in case of an emergency. You can invest these savings in a tax-free savings scheme to help you reach your savings goals quicker – just be sure to find out if there are any costs involved when withdrawing from these accounts.
4 Create a facility for crisis cash
While you are building up your emergency savings, make sure you’ve got some form of credit or overdraft facility set up to use in case something happens and you need access to emergency funding to see you through the crisis. Avoid racking up unnecessary debt by only using this facility if you truly need to.
Live and review
Once you’ve completed your budget, NDA suggests, see if your money plans align with your short-term and long-term goals. Do this after you’ve attempted to live within your budget for a few months. If you’re having difficulty adhering to your budget, you may be spending money on things that aren’t within the goals that you’ve set for yourself.
Review your budget every month and don’t beat yourself up over small transgressions. In essence, a budget is an estimate of money coming in and going out. Take the time to go back and review what actually happened. Where did you overspend? Where did you save? What can you do differently next month?
While it’s important to review your budget every month, you’ll also probably need to recalculate your budget every three to six months, or whenever something changes dramatically in your financial life.