There isn’t a better time to take control of your finances than at the beginning of a new year. Instead of berating yourself for splurging over the holidays, commit to implementing a simple 12-step plan – one step a month over the next 12 months – towards a more financially secure future.
Niel Fourie, a public policy actuary in South Africa, suggests the following 12 steps.
January: Begin with a budget
A detailed budget is one of the most important tools for achieving your financial goals, Fourie says. “Without an understanding of what you are actually spending versus what you can afford, you will likely keep falling into debt,” he says.
Begin by recording your monthly expenses, using a notebook or budgeting app. With a realistic understanding of your finances and spending, plan your monthly budget according to your needs (such as rent, electricity, transport, savings and risk cover) and wants (movies and eating out).
As part of your budgeting exercise, look for ways to cut back on unnecessary expenses. “Instead of paying for a subscription, for example, you could be paying off an expensive debt. And if you are lucky enough to be debt-free, rather invest this money.”
February: Prioritise repaying short-term debts
Make repaying your short-term debts, such as credit cards and store accounts, your top priority in order to ease the strain on your budget.
Short-term debt with high interest rates can quickly snowball, placing huge pressure on your finances. Paying off these debts will give you a welcome psychological boost, Fourie says.
March: Consult a financial adviser
With a budget in hand, think about the financial goals that you would like to achieve. Divide these into short-term goals, such as an upcoming holiday or an educational course, medium-term goals, such as a new car or your child’s education, and long-term goals, such as a secure income in retirement.
“Then consult a trusted financial adviser to develop a financial strategy that will help you to reach your goals. Your adviser will be able to help you choose the best investment products for your goals,” he says.
It is also very important that your financial strategy includes protection against risks that could leave your family financially destitute, such as death, disability and severe illnesses. Your personal needs will determine what type of cover you should prioritise. Your financial adviser can help you with this.
“Your financial strategy needs to be reviewed annually with your adviser as your personal circumstances change,” he says.
April: Protect yourself against the unexpected
Start implementing the advice received from your financial adviser, starting with life and disability cover.
Fourie says that if you are a breadwinner with dependants who rely on your income for survival, you owe it to them to have sufficient life and disability cover in place. If you are a young income-earner with no dependants, you owe it to yourself to have at least disability cover in place.
He explains that a young person who becomes disabled and can no longer earn an income would have to rely on one lump-sum disability payout for a lifelong income.
“While insurance is often a grudge purchase, it is vital to protect your future income against unexpected events which could plunge you or your loved ones into financial hardship,” Fourie says.
Medical cover is also extremely important, because the high cost of health care poses a significant risk to your financial well-being, particularly if the treatment requires hospitalisation, he says.
You need to ensure that you have sufficient short-term insurance to protect your valuables against risks such as fire, weather-related damage, accidents and theft. This includes your home, car and personal belongings, such as jewellery and electronics.
“Also remember that being unable to live in your home or use your car could mean significant expenses beyond repairs or replacement, as you would have to find alternative accommodation or transport. This is why comprehensive short-term insurance is so important,” he says.
May: Draw up a will
Dying without a will places a huge financial burden on your family, because the laws of intestate succession mean that your loved ones may not be provided for in the way you would hope, Fourie says.
Begin the process by gathering details of your debts, insurance, investments and any other assets. “Then consult an attorney or financial services provider to assist you, as there are a number of legal complexities in drawing up a will that you may not be aware of,” he says.
June: Chip away at your long-term debts
Once you are rid of short-term debt, increase your repayments on long-term debt, such as your mortgage or student loan. “Even adding just R200 a month could take thousands of rands off your total repayment,” Fourie says.
July: Invest towards your financial goals
July is National Savings Month, so get into the spirit by looking for additional ways to save, and invest your money towards reaching your financial goals.
“If you struggle to save at first, aim to increase your savings over time. You could, for example, save five percent of your salary this month, six percent the next, and so on,” he says.
August: Reflect on your progress
Stay motivated to stick to your financial goals by taking the time to reflect on your achievements thus far.
Fourie also suggests that you teach your children important financial lessons to prepare them for the future, focusing on budgeting, distinguishing between wants and needs, and the importance of saving.
September: Pay the taxman
Get a head start on completing your annual income tax return.
This is a good time to learn about the various taxes that may apply to you. Visit the website of the South African Revenue Service (www.sars.gov.za), which offers useful advice and explanations, Fourie says.
October: Review your medical cover
The window for you to change your medical scheme option opens in November or December, so prepare by researching and comparing the options offered by your scheme.
Fourie says you could consider changing schemes if you are unhappy with the benefits or level of service provided by your current scheme. “However, it is important to research the various waiting-periods and exclusions that may apply.”
November: Make the most of sudden windfalls
If you are lucky enough to receive an annual bonus, plan carefully to make the most of your windfall. Channel funds into repaying outstanding debt, or consider creating a rainy-day fund to help you cope with unexpected expenses, such as vehicle repairs or a new geyser.
Fourie says you should continue adding to your emergency fund until it equals at least three times your monthly salary. He suggests that you deposit this money in a separate bank account or money market fund in order to avoid the temptation to spend it.
“With the upcoming holidays, you could allocate some funds towards rewarding yourself and your family, or consider helping someone less fortunate or a charity. It is also important to remember that new-year expenses, such as textbooks and uniforms, lie ahead,” he says.
December: Take a stress-free holiday
After a year of dedicated hard work, you should have covered all your financial basics, including:
· A budget;
· Life and disability cover;
· Medical cover;
· Short-term insurance;
· A savings and investment strategy;
· A will; and
· An emergency fund
“If you have not achieved all these goals, pencil them in for first thing in the new year. You should also make sure that your family knows where to find important relevant financial information and who to contact in the event of an emergency,” Fourie says.
Finally, enjoy a care-free holiday, and congratulate yourself on entering the new year on a secure financial footing.
-Niel Fourie for Personal Finance