Sometimes in my line of work I meet people who remind me just how badly South Africans need financial education – and it is not just those people with very little money and a lot of debt who need help.
Today, I’d like to introduce you to Barbara (not her real name). Barbara is an ad exec in her thirties who doesn’t have much debt, but she had been blowing through her entire income every month without saving or investing a cent.
When Barbara came to me she was terribly unhappy. She knew that she wasn’t doing too badly with an income of R50 000 per month, but she felt that in order to secure her future financially she would need to be earning a lot more.
I told her she was looking at it all wrong. She didn’t need to earn more; she needed to start a budget with what she had! We sat together and looked at her monthly expenses to see where her money was going. This is what we came up with…
Earning: after tax R36 000
Food - R8500
Rent - R15000
Water & electricity - R1500
Petrol - R2000
Telephone - R1250
Clothing - R2500
Dog food - R700
Helper - R1440
Debt repayments at various institutions - R3400
Total expenses: R36 290
Note: Barbara has a car allowance, paying for her car and so only needs to pay for her petrol.
1st Problem: No budget
Solution: First I helped Barbara to draw up a monthly budget. Then I showed her how to factor in the important things she needed to do – like save, invest and get insurance cover.
Action: With her new budget, Barbara and I could start planning properly for her future.
2nd Problem: High rent – servicing someone else’s debt without paying off her own asset.
Solution: Her rent was so high that she could easily buy herself an apartment or she could look at something a bit more cost effective and save the additional money so that she had a deposit for her own property
Action: Fortunately she asked her landlord if she could purchase the apartment she lived in. He said yes, and the sale agreement was signed. Now, she has the security of owning her own home – and when she receives a bonus she puts it straight into her bond.
3rd Problem: Debt
Solution: While Barbara wasn’t over-indebted for someone with such a high salary, there was no need for her to have the debt in the first place. She needed to pay off her debt as soon as she could and not take up any more in future.
Action: Barbara paid off one line of credit each month and finally her credit card - we had a card-cutting-up ceremony to celebrate and make sure she never started the cycle again.
4th Problem: No savings or investments
Solution: Barbara needed to start saving. It really was as simple as that. She didn’t need to spend all her money every month. She just did it out of habit and because it was there.
Action: By changing her mind set and paying herself first, Barbara started putting away R1 500, which is not ideal for her salary but it was a start. She also went to see a financial planner about the best type of investment for her needs. She recently let me know that she has a lot more of her monthly salary saved up, which is great to hear. Although Barbara still has a way to go with the next step a retirement annuity.
5th Problem: Having no financial security - Savings, investments and/or insurance cover which is her safety net should anything impact her ability to earn a salary.
Solution: While paying off a house and starting to save were good steps towards financial security, Barbara’s financial advisor also suggested she take out a hospital plan as well as dread disease and disability cover as these provide her with the protection should she be unable to work for any reason.
Action: Barbara bought the products her financial advisor suggested with the money she saved from paying back her debt and now has peace of mind and protection should something happen to her.
It’s worth mentioning that the financial problems Barbara found herself in had solutions and all it took was the first important step of creating a budget followed by discipline in order for her to change her current affair into financial wellbeing. Bearing in mind she achieved a financial turnaround, without earning more or without any specific cut-backs to her existing lifestyle.
Given her current income, Barbara still has a lot of work to do. She needs to save more, spend less and put away a significant amount towards her retirement, but with the steps we have taken here Barbara is now paying off an asset, is covered for any emergencies that will impact on her ability to earn and has the beginnings of a substantial savings buffer showing that Barbara is walking in the right direction with confidence.
The views and opinions expressed in this article are those of the authors and do not necessarily represent or reflect the views of 1Life or its employees.