Wednesday | 15 April | 2020
By Anja van den Berg
Financial planning is an encompassing concept that includes topics like budgeting, retirement planning, saving, insurance and getting out of debt. You do not, however, have to be a financial planning expert to have a firm grasp of what each of these concepts means and how they concern you. Use this guide to gain a deeper understanding of how financial planning concepts interlink to lay the groundwork of a solid financial foundation for you and your family.
The personal budget is the backbone of your spending plan. You will use it as a roadmap to reach your financial destination. While the word “budget” is often associated with restricted spending, the concept of a budget refers to more efficient spending. A budget will show you how much money you expect to bring in against all your expenditure, i.e. from the compulsory expenses such as house payments and rent, to discretionary spending such as entertainment.
As a personal financial planning tool, a monthly budget allows you to plan for how you’ll spend or save your money each month and keep track of your spending patterns.
- Cutting expenses
After you’ve successfully created a basic budget, you’ll have a much better understanding of where your money goes and where you can trim expenses. For many people, this is as simple as cutting back on some of the little things that can add up. For others, it may mean taking a closer look at spending to make deeper cuts to create a wider gap between monthly inflows and outflows. Reducing expenses is essential for three reasons. First, it can free up more money in your budget so that you’re less inclined to rely on credit cards or loans to cover gaps due to spending. Second, if you have debt, putting extra money back into your budget can help you pay it off faster. Third, having extra money can help you boost your emergency fund or grow retirement savings.
- Getting out of debt
Even after creating a sound budget and cutting unnecessary expenses, you may still find yourself with lingering debt. Debt-to-income ratio is the percentage of your monthly income that goes towards paying your debt. A healthy debt-to-income ratio is no more than 35%. Yet, the household debt levels in South Africa are staggering. According to the debt counselling firm, DebtBusters, the average debt counselling clients who earn more than R20 000 a month is spending 64% of their income on debt repayments. Getting out of debt is not an easy task, but it can be done. It takes commitment and a plan to become and stay debt-free. There are two ways in which you can pay off your debt viz. paying off the highest interest rate first, and the ”snowball”’ method.
- Saving for retirement
Retirement savings need to become a priority instead of an afterthought. Earlier this year retirement income specialists Just published a new survey focusing on the saving habits of South Africans. The key findings of the study revealed several significant challenges facing today’s retirees that ariseg from common misperceptions of retirement income. The critical concern arising from the study is the high proportion of people approaching retirement who have not saved enough. Yet, they expect an unrealistically high level of income from their existing retirement pot. The survey highlights the vital role of careful planning to help make informed decisions around the effective use of limited resources.
You’ve created a budget, cut expenses, eliminated your credit card debt and have started saving for retirement, so you’re all set, right? While you’ve come a long way, there is one more crucial aspect of your finances that you need to consider: insurance.
You’ve worked hard to build a solid financial footing for you and your family, so it needs to be protected. Accidents and disasters can and do happen and if you aren’t adequately insured it could leave you in financial ruin. You need insurance to protect your life, your ability to earn income, and to keep a roof over your head. Life insurance, disability insurance and homeowners’ insurance can help with those scenarios.
My Money Coach: https://www.mymoneycoach.ca/budgeting/what-is-a-budget-planning-forecasting
City Press: https://city-press.news24.com/Personal-Finance/how-to-get-out-of-debt-20200306-4
The balance: https://www.thebalance.com/financial-planning-basics-personal-finance-101-1289798
The balance: https://www.thebalance.com/how-to-make-a-budget-1289587
Business Tech: https://businesstech.co.za/news/finance/363902/half-of-south-african-retirees-plan-to-rely-on-their-children-if-they-run-out-of-savings-study/
Money Web: https://www.moneyweb.co.za/financial-advisor-views/why-its-a-good-idea-to-start-saving-up-towards-your-retirement-now/
* All information was correct at the time of publication.