Spending Yourself Homeless?

Spending Yourself Homeless?

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In today’s society, where impressions are so important, we even find wealthy individuals spending to impress. One famous person comes to mind – Mike Tyson. “Iron Mike” was earning $30 million a fight at the height of his career. He spent his fortune on mansions,Bengaltigers and jewellery.

In South Africa, not many of us own Bengaltigers, but many individuals feel compelled to purchase a flashy car or beautiful apartment on the beach – both of which might be well beyond what we can afford.  Living within our means is the foundation of financial stability. Below are a few signs that you are living beyond your means.

1) You can’t survive without your salary for at least three months.

Everybody needs an emergency fund as the basis of their financial plan. How big this fund should be depends on how long you would expect to be unemployed if you were retrenched.  A fund equal to three months’ salary is reasonable but six months would be ideal.

However this is unattainable for many South Africans. If you are a self-employed individual then you should provide for at least six months – especially in the current economic conditions.  Your emergency fund could also be used for some other unanticipated emergencies, such as a major medical expense, or vehicle repair.

2) Saving less than 10% of your salary

 

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The majority of South Africans are chronically under saving. It is critical that we are saving at least 10% of our income from when we get our first job for our retirement. If we start saving later in life, we would need to save significantly more than 10%.

If you need to save for a shorter-term goal such as travel or buying a big asset, then you might have to save even more.

3) Our housing costs are more than 30% of net salary

Our housing costs are too high if we are paying more than 30% of our net salary towards a bond or home rental. This is a general rule of thumb, but we would be in a significantly better financial situation if we follow this guideline. Consider moving to a smaller house if this sounds familiar.

Also consider this number if you are applying for a bond. Just because the bank is willing to offer you a loan of R1 million, does not mean you should take the entire amount, if the bond instalment is more than 30% of your salary.

4) Not budgeting

Stick to a budget. If you’re currently living beyond your means, a detailed budget can help you get back on track. Keep in mind that while you may think you can keep a tally in your head, it’s important to have a written budget so you can keep track of all your expenditures.  It is very easy for things to spiral out of control if you are not following a budget or planning your expenses.

Also, not budgeting can increase emotional spending – which could very quickly get you into debt. ‘Retail therapy’ adds up – and all too often, it leads to financial disaster.

5) Constantly using your credit card

Although credit cards may come with fantastic benefits (such as eBucks through FNB) and allow us to purchase items online, it is important that you are aware of how much you are spending. According to several studies, shoppers who rely on credit cards rarely know how much they spend until their statements arrive.

Shoppers who use cash should be a lot more aware of what they are spending. Consider paying with cash or transferring money to your credit card if you find yourself getting into debt through credit card purchases.

Andrew Padoa
Andrew Padoa works in the Private Client’s division at Consolidated Financial Planning. His area of expertise is investments, estate planning, retirement planning and portfolio benchmarking. He has had numerous articles published in the media on a number of topics related to personal financial management. Andrew is passionate about educating people and has given several financial literacy talks to both schools and corporates. His objective is to use his abilities and knowledge to help others achieve their financial goals. Visit www.consolidated.co.za for more information