Managing money is like a journey. Think of it as a road trip – there may be the occasional wrong turn or dead end, but what’s important is that you are moving along in the right direction. As long as we regularly check how we are doing with our money, we can identify and fix any problems.
We’ve found five financial mistakes South Africans made in 2017, and have come up with ways to avoid making them in 2018.
1. Not having an emergency fund This is common across the world, and a major cause of financial distress. Emergency funds are used for anything from household and vehicle repairs to medical bills. Only 8% of South Africans save for short term needs, including emergency funds, according to a 2016 Finscope survey.
Save for emergencies, even if you are in debt.
How likely is an emergency? Well, think of your last six months’ expenses. Did you spend more on school items than you had planned for, or perhaps you needed to take unpaid leave, or help a relative through a difficult time? Emergencies happen and without emergency savings you may struggle to find the spare cash, or find yourself borrowing money at a very high interest rate.
Plan for 2018: Add emergency fund savings to your budget as an expense. Don’t put off saving for emergencies because you are paying off debt, it’s a must have. Plan to save a set amount each month in a low risk interest bearing account that gives you immediate access to your funds. Aim to save three months’ salary in your emergency fund.
2. Not having enough life and disability insurance An average South African earner needs R1.4 million life cover for their family to maintain their standard of living if they pass away, but has just over R500 000 life cover. This is according to the 2016 Insurance Gap study and means you may be underinsured by as much as R900 000. On average, South Africans have R1.1 million less disability insurance than they need to maintain their lifestyle if they become disabled.
Plan for 2018: These numbers are averages so it is best to do a financial needs analysis to work out if your cover is adequate. If your financial affairs are straightforward you can use our online financial needs analysis or call us on 0860 10 53 40 and talk to a consultant who will assist you.
If your financial life is complicated, and you support numerous family members, perhaps different households or have different incomes and commitments, a more detailed financial needs analysis with a financial advisor may be required.
3. Not planning and saving for retirement There is over R3 trillion saved in South African pension funds. This is impressive, and well done if you are saving for retirement. Unfortunately, not enough are. The 2016 Finscope survey found that only 18% of South African adults are saving for the long-term. We know you’re keen on gaining and keeping your financial independence. That means you need to give some attention to retirement. Even if you plan to work forever, there are times when you will need to slow down and work less, or take a complete break.
Plan for 2018: Think about what retirement means to you, when, where and how you want to do it, and how much it would cost. Ask your financial advisor questions about what financial problems retirees experience and how you can avoid them. Make saving for retirement a budget item, and save as much as you can.
4. Having too much debt South Africans have too much debt - quite simply, we’re borrowing more than we can afford to. 1Life found in our survey earlier this year that R72 of every R100 earned is going towards debt. Debt can be costly if your interest rate is high. If you reduce your debt, you reduce the interest you have to pay. Money you are paying in interest is money you could be using for savings or education.
Plan for 2018: First look at your current debt, how much it costs and set up a plan to pay it off. Then look at big ticket items you would usually buy on credit and set up five and ten year savings plans for these. If you need to, use tactics like hiding your credit cards to avoid going into debt. And don’t forget when you budget to include a few luxuries so you don’t have to use credit for these items.
5. Not paying attention to terms and conditions One of the main reasons for rejecting a claim on an insurance policy is non-disclosure. For example, you don’t mention a previous serious illness on your life insurance application, or forget to tell your insurer you’ve taken up an extreme sport. Not all of these mistakes are intentional - some just happen when we fill out forms quickly and don’t pay enough attention to the questions. Some happen when we don’t go through the terms and conditions of the policy. We know, the fine print can be small, long and complicated. But it really is important to know the exact terms and conditions for every account and policy you have.
Plan for 2018: Look at your active accounts and policies – take them one at a time and find out what terms and conditions, and rules apply. If you don’t understand, phone the company and ask for an explanation or speak to your financial advisor. And never, never sign anything someone puts in front of you and says, “sign here, here and here”. Make sure you read and understand contracts before you sign. If someone is pressuring you to sign quickly, decline and ask for a copy of the contract to review over a few days.
Final thought We all have good and bad financial habits. Take some time to identify your bad financial habits and set up a few simple ways to change them. It could make 2018 your best financial year.