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Managing Income, Debt and Savings

Assess your financial position and put measures in place to better manage your income, debt and savings.

Juliet Pitman

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In tough financial times, most people would rather avoid thinking about how much things cost and whether they have enough money to cover their monthly expenses. The reason for this is usually that money issues– particularly when the issue is that you haven’t got enough of it – make people feel disempowered. In addition, many people (even those who run their own businesses) don’t have a clear sense of how much they spend every month and they sometimes imagine that problem is greater than it actually is. If financial issues are causing you concern, the worst thing you can do is adopt the ‘ostrich approach’ and stick your head in the sand. Now is the best time to take stock of your financial position – and take back control of this aspect of your life or business.

Take Stock

In order to determine whether your financial position is a good or bad one, you need to be able to answer three questions:

  1. Are you spending more than you earn?
  2. Does more than 15% to 20% of your monthly income gom towards credit payments (this would include credit cards, car hire purchase payments and other such expenses, but would exclude your housing bond)?
  3. Do you have a savings fund that could cover at least three months’ worth of your living expenses in a financial emergency? You should be answering ‘no’ to the first two and ‘yes’ to the last question. If you’re one of the people who can’t provide an answer, following the steps below will help you to develop a clear picture of your financial position – and provide you with the tools to improve it.

Step 1: Determine Your Debt to Income Ratio

As interest rates go up, interestlinked credit payments will eat into more and more of your income. Financial advisors recommend that it’s unwise (and for most families not sustainable) to spend more than 20% on credit payments. Working out what this percentage is, is known as determining your debt to income ratio.

  • Identify all sources of income. As a first step, you need to determine how much money you have coming in each month. If your household has two earners or you have more than one source of income, list each of these separately. Only look at the take-home amount – that’s after tax and deductions such as UIF and company contributions to medical aid and retirement annuities.
  • List debts (excluding your house). Identify each of your monthly credit payments, except for your house. This will include loans, car payments and credit cards.
  • Determine your debt to income ratio. Divide the total monthly credit payments by your total monthly income. This will give you your debt to income ratio. Now multiply the figure by 100 to get a percentage – for example, if the figure you end up with is 0,2 multiply it by 100 to get 20. This figure indicates the percentage of your income being spent on credit payments or debt other than your home. If the number you come out with is above 20%, you need to investigate ways to reduce your debt.

Step 2: Track Your Monthly Expenses

Expenses can be divided up into fixed expenses (those thatm remain the same each month and are difficult to control), flexible expenses (those that vary from one month to the next and are easier to cut down on) and periodic expenses (those that you only pay once or twice a year, but that are easy to forget about). Firstly you need to know what your monthly expenses are before you can identify areas where you can save.

  • List all your fixed expenses, including your house payments. This will include car, medical aid and retirement annuity (if these come out of your take-home salary), bond repayments or rent, school fees, membership fees to gyms or clubs and subscriptions, to name a few.
  • List all your flexible expenses. This will include things like petrol and food costs, utilities, phone bills and entertainment. Because these expenses vary, you will need to work out an average. Record how much you’ve spent on these things over the past three months and divide the number you get by three to get an average.
  • As a further exercise list all your daily expenses for a week. It’s best to write down each amount as you spend it because it’s easy to forget the little things like parking and tips, but if you find this too tedious ensure you get –and keep – a receipt of absolutely everything, and then add it all up at the end of each day or the end of the week. Most people find this exercise a real eye-opener as it shows how much you spend on the things you don’t think about, such as cooldrinks, parking, eating out and snacks. Now go back to your flexible expenses list and make sure you’ve made allowance for these incidental expenses as well.

Step 3: List Your Expenses to Determine Monthly Savings Needs

Now you need to track your period expenses. Although they only crop up once or twice a year, they’re easy to forget and usually fairly hefty, which means they can wreak havoc with your financial situation if you don’t plan for them. Once you’ve worked out what they are, however, you will know how much to save accordingly.

To determine what your periodic expenses are, go back over each month of the previous year and pick out those payments that don’t occur monthly. They might include things like repairs for your home or car, school clothes, gifts, holidays, birthdays, graduations, car licenses, special occasions like weddings, emergency medical expenses and replacement of appliances at home.

Try and work out what these might be for the year ahead. Once you’ve added all of these up, divide the number by 12 and this will give you an indication of the amount you need to save every month to cover those things not already included in your monthly expenses.

Step 4: Compare Your Income to Your Expenses

Now that you have a list of all your expenses, seen and unforeseen for the year ahead, and an idea of exactly how much money you have coming in, it’s time to answer that first question: are you spending more than you earn? Subtract your total monthly expenses from your total monthly income – what’s left over is what you have to save for a rainy day. But if you end up with a negative figure, you need to do one of two things – reduce your expenses or increase your income. For most people, earning more is considerably more difficult than spending less so try to focus on what you can control, which is reducing your monthly expenditure. Work out how much you can spend on each flexible expense item a week and keep track of exactly how much you’re spending.

Step 5: Keep a Lid on Spending

Some people find it easier at first to put the amount of cash for each item into an envelope so that they know exactly how much is left, and to stop spending once the cash is finished. Having a budget however is a much easier way to prevent expenses from getting out of control. Knowing what your past income and expenses were gives you the tools you need to create a future spending plan. Look at which flexible expenses you can reduce or cut out altogether and don’t forget to include your emergency savings fund for periodic annual expenses.

By using the following formula, you should aim to end up with a balance that gives you a surplus, not a deficit.

Step 6: Start Saving

Financial advisors highlight the importance of saving money in order to cover you in an emergency such as a massive unforeseen expense or the loss of family income. They advise that you have enough put away at any time to cover at least three months of living expenses. This will protect you from being in the situation where your family is one salary cheque away from bankruptcy. Use the surplus from your budget each month to save. It’s a good idea to put this into a separate account that you only access for true emergencies.

In Conclusion

While the above might sound like a massive undertaking, you only have to do it once or at the most twice a year. And once you’ve done it once, it gets easier each time. It’s a good idea to assess your expenditure against your budget every few months to ensure that you have not slipped back into bad over-spending habits. And remember, it’s not true that what you don’t know can’t hurt you. So take the financial bull by the horns and get back control of the situation. You’ll never regret it.

Juliet Pitman is a features writer at Entrepreneur Magazine.

Personal Finance

(Infographic) The Financial Advice Millennials And Gen Zers Want To Know

Having a grasp on your financials is tricky, but it’s crucial if you want to be successful. And that starts with getting the right advice.

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Whether it’s saving for retirement or paying off credit card debt, money management can be a challenge. Of course, different people have different concerns – and that often comes with age. While a 60-something baby boomer might be organising their savings for retirement, your 20-something millennial might be focused on paying off student loans.

In a recent study, financial intelligence company Comet surveyed more than 1 000 people to uncover the top financial concerns of various age groups, as well as the financial advice millennials and Gen Zers want to know and what they hear instead.

Overall, saving for retirement was the top concern across all age groups, with saving for an emergency and affording monthly bills following in second and third. However, it’s no wonder these are some of the most pressing worries – according to the research, 23 percent of people admit they don’t have a savings account, and 43 percent reported not being on track towards their retirement goals. Perhaps that’s because they didn’t hear the right advice growing up. At least that might be the case for Gen Zers and millennials.

According to the research, these young people want to learn things such as how the stock market works, how to manage an investment portfolio, how to invest in real estate and how to build credit. Instead, they’re simply told how to create a budget, save for retirement and pay credit card bills in full every month.

Related: 7 Critical Things Your Financial Advisor Must Meet

Having a grasp on your financials is tricky, but it’s crucial if you want to be successful and comfortable. To learn more, check out Comet’s infographic below.

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Related: Financial Wellness Coach Nelisiwe Masango Shares Retirement Wealth Advice

This article was originally posted here on Entrepreneur.com.

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Personal Finance

14 Ways To Make Quick Cash On The Side

If you need money quickly, here are some solid ideas.

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Need to make some fast money on the side, whether it’s to pay off a credit card or to make your rent?

Keep in mind, making quick side cash isn’t about making a lot of money or getting rich. It’s about getting a shot of capital to help tide you over and put something extra in your pocket. However, some of these side-income ideas can build up your wealth over time. There’s many ways to accomplish this: By participating in the gig economy, the sharing economy, online sales networks, passive income techniques and more.

If you’re looking to make extra money in a relatively short period of time, check out these 14 slides.

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Personal Finance

Take Advantage Of Financial Democracy Made Possible By The New Stock Exchanges

Why should financial democracy matter to entrepreneurs?

Etienne Nel

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Because it creates a society able to afford products and services. Without it, even the innovative products and services that are entrepreneurs’ bread and butter will fail.

What is financial democracy, exactly?

It’s both the right and the ability of the (wo)man in the street and business people to make the decisions that affect their financial circumstances.

Financial democracy does not automatically follow political democracy. For almost 25 years after South Africa’s political transformation, the exclusiveness of our financial markets continued to deprive the vast majority of South Africans of the means to invest, save, and build wealth. South Africa has, therefore, never developed a retail stock exchange environment. So, it has deprived the majority of small and medium sized business of access to capital.

For entrepreneurs to truly flourish, they need a mechanism that easily and seamlessly connects the investor pool with every size of business. And, they need affordable ways to enter both the retail and institutional market.

In short, they need stock exchanges. Ones on which listing takes weeks rather than years, doesn’t break the bank for listing fees, and provides the shortest route to the largest possible potential investor base.

That’s not been possible in the stock exchange monopoly that existed for six decades. Now, it is.

What’s changed?

We now have four new stock exchanges. The resulting competitive environment will significantly reduce the cost of listing – and the cost for investors of buying and selling shares.

Instead of restricting share trading to people or organisations who already have tens of thousands of rands to invest or millions to spend on listing, by licensing four new stock exchanges, the Financial Services Conduct Authority (FSCA, formerly the FSB) has recognised that most financial decisions do not call for high levels of education.

Related: The Role Of Foreign Exchange In The Economy

Most people know how to spend their own grocery money. Most know that it’s better to keep their R1 000 monthly income in a coffee jar than spend R50 of it on bank account fees. People who can barely read and write are immensely skillful at manipulating air time deals to their advantage.

There is significant financial savvy in all social strata.

In the same way, although the mechanics of bookkeeping and accounting may be unfamiliar territory to many entrepreneurs, most have a clear understanding of the difference between profit and loss.

The FSCA has therefore enabled democratisation of the financial markets by enabling the broadest possible spectrum of entrepreneurs and investors to use stock exchanges to participate in and contribute to the economy – on their own rather than prescriptive terms.

How do you take strategic advantage of this democratisation?

  1. Base your business strategy on people’s instinct for making decisions in their own best interests. Trust financial decentralisation, such as one sees in crowd funding and in digital environments such as block chain, where people would far rather trust one another than institutions and governments. This is democracy innately at work in the financial environment and it’s accelerating organically as digital technologies give people more means and the confidence to help themselves – to information and opportunities. Ride the wave.
  2. Tap into people’s desire to innovate. Consumer organisations have proved that letting people interactively help them develop products is a powerful growth engine. Apply the principle by letting people grow your business by buying shares in it, giving you capital and themselves a platform on which to build wealth.
  3. Remember, the ultimate loyalty reward is equity.

Your financial democracy business plan

Look to list on an entrepreneurial stock exchange; one that was founded by entrepreneurs on entrepreneurial principles.

That means: A stock exchange that is already built on financial democracy and decentralisation. One that has, at its core, a single operational concept that keeps things simple for you, automatically gives you an immediate competitive advantage, and, ensures that no matter what your business needs in terms of attracting capital, the exchange can provide all the options in the same, consistent way.

What does such an exchange look like?

It has fintech capabilities. So:

It slashes your listing costs. It achieves this, among other things, by enabling you to populate an electronic prospectus, demonstrating your financial viability, and self publish.

It gives you control by having the granularity and agility to impose relevant governance right down to the individual investor. You get to decide the types and quantities of investors you want to attract. This also enables you to achieve black economic empowerment in perpetuity.

It leads the world by clearing and settling trades in T+0. No-one in the value chain has to hold large sums of money for days following a transaction. Small transactions become profitable. Investors don’t have to risk their life savings on a single large trade. A retail market is opened. An investment and savings culture is entrenched. The economy expands. Your business grows steadily.

It enables anywhere, any time trading via a mobile app that allows investors to see share value in real time. See economy expansion point above.

It integrates processes and procedures, simplifying them and ensuring rapid onboarding of issuers and, therefore, speed to market with new concepts and alignment with the digital economy.

It operates a principles-based regime. So:

It treats you, as an executive, with respect. It’s not prescriptive. It does not insist on excessive oversight, allowing the Companies Act to guide you to sustainability.

It does not attempt to squeeze your company into a pre-defined business or listings format. It recognises and works with your uniqueness.

It obviates the need for expensive specialist listings advisors.

It focuses on financial inclusion and access. So:

Shares can be bought and sold for no more than R1 000. See economy building point above.

Related: 27 Of The Richest People In South Africa

The new world of stock exchanges is integrated, synergistic, holistic, organic, self-fulfilling

Decentralisation of financial control, democratisation of opportunity leads to a whole new economy. One in which, for instance, a taxi operator can finance a minibus through a company in which his purchase gives him shares. A single purchase gives him two benefits: a vehicle on which to found his business and a longer-term investment in shares that he can trade. The funding company gains liquidity through access to a wider base of investors while being able to control who buys and sells and the conditions on which trading takes place. Increasing black equity in business becomes an organic, natural, self-perpetuating process.

Everyone wins in a decentralised, democratised financial market. And it’s the stock exchanges that drive the process.

As an entrepreneur, can you afford to ignore the acceleration that listing could give your business growth?

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