Share

OneRandMan inspires budgeting advice

accreditation
Karin Muller, head of Sanlam’s growth market solutions. (Supplied).
Karin Muller, head of Sanlam’s growth market solutions. (Supplied).
Cape Town – Fin24 has been following the OneRandMan closely during Savings Month and seeing how breaking his spending down to a visual experiment has helped him understand where his money goes. We’ve asked a Sanlam expert to give advice on a few questions related to the OneRandMan.

Karin Muller, head of Sanlam’s growth market solutions answers our questions…

What does OneRandMan’s experiment illustrate about budgeting and saving?

The OneRandMan experiment shows the importance of knowing where your money is going. If you know exactly where your money is going, you can do something about it. Spending money without having a budget in place is likely to make you feel as if you don’t have control over your money.

On the other hand, if you’re able to track your spending based on a budget, you’re more likely to curb spending on unnecessary items and identify overspending. This, in turn, will enable you to identify where you’re able to save more.

We can also see how much is spent on credit. Take care with credit, if you’re not careful, it can slowly eat away your wealth and make you dependent. Paying for items in cash, based on what you’ve budgeted for, is more likely to keep you on track than buying on credit.

If you’re concerned about your ability to keep track of your spending, use cash for your daily needs wherever possible, and use credit for larger purchases. This helps you to be more mindful of what something costs and whether you can afford it.

Instagram: "No amount of R1 coins can top this view. #latergram"


A couple of other learnings from the experiment are:
- It is important to base your budget on a short term, medium term and long term financial plan.
- A budget or financial plan helps you to understand why it is important to save and motivates you to save

What basic tips could help people who don’t want to go the R1 coin route?

Budgeting and saving can be challenging. Get professional financial advice to ensure that your budget is a realistic reflection of your income and takes into account your dreams for your future.

Be realistic. It does not help to draw up a budget that has no relation to your needs and commitments, because you will not be able to stick to it.

Small changes add up. Small savings can lead to big savings. Cutting back on unnecessary spending can help you to identify a meaningful amount to start saving instead of spending.

Work out a savings plan. It is the only way to achieve your dreams and to build wealth over time.
Understand the difference between “good” credit and “bad” credit and make smart choices.

Make sure you understand the cost of credit and carefully evaluate your decisions to buy on credit.

Understand your own personality to ensure that you also understand the risks associated with your spending behaviour; and come up with a plan that considers these risks.

Review your budget regularly to ensure that you stay on track. Compare your actual expenses with that which you created in your budget. This will show you where you’re doing well and where you can improve.

It seems that cars are a big problem. What percentage of your income should go here?

As South Africans, we spend a lot of our income on transport costs. According to Unisa’s Bureau of Market Research’s Income and Expenditure analysis, transport was the second biggest expense in most income categories and for households who earn more than R520 000, it was the single biggest expense. This expense category includes spend on cars and related expenses like insurance.

When thinking about what percentage of your income you should spend on a car there is no simple answer since we all have different needs, income and family situations and responsibilities.

There are many “rules of thumb” about how much to spend on cars and homes. These are however all focused on the maximum amount you should spend on these items. Typically as a rule of thumb people are encouraged not to spend more than 30% of their monthly income on buying a home and not more than 15% on a car. However, these are the maximums and not an indication of how much you should spend - ideally you would like to spend quite a bit less. This also does not take into account all the additional costs of owning a car or home which you should also budget for. When planning to buy a car, budget properly and take into account all vehicle related expenses – insurance, fuel, maintenance etc.

It is also useful to think about what else you can do with the money. For example: If you decide to buy the R5 999 per month car rather than the R6 999 car, the additional R1 000 invested can be worth about R150 000 with a return of 4% per annum after 10 years.

How much you are paying for the car is also influenced by how the vehicle finance is structured. Often vehicle financing is structured with something called a “balloon payment”. A balloon payment is expressed as a percentage of the loan amount and is only payable at the end of the loan term.

The idea behind offering a balloon payment is that it can significantly reduce the monthly vehicle repayments, thereby making the car seem more affordable. The catch is that at the end of the loan term, you need to come up with a large amount of cash to keep the car, and if you can't, your car will either be repossessed or you will be “forced” to trade in the car, purchase another one and start the cycle all over again.

A good rule of thumb when buying a car on credit is to avoid balloon payments at all costs. Also try to pay off the car over the shortest time possible. If you cannot afford the car repayments without the balloon payment then you actually cannot afford the car.

Watch:

Laura du Preez, editor of Personal Finance, talks about what we can learn from episode 3 of the OneRandMan and highlights the impact of living on credit:



What percentage of your income should go into an asset like a new home or rental?


As mentioned, there is a rule of thumb that you should not spend more than 30% of your income on your home. Buying a home is one of - if not the biggest - financial decision you will make – one that you will be paying off for the next 20 years. So consider obtaining professional financial advice before you make this big decision – not to help you with the right house or location close to the best schools, but to look at your entire financial position and the impact of this decision on your long-term finances.

Don’t only consider how much of your income you are currently spending on your home, but also consider what will happen if interest rates increase. Interest rates are cyclical, and despite the fact that they are currently low, they have started to rise. You don’t want to be in a situation where the interest rates increase to the extent that you can’t afford the debt repayments, and run the risk of losing your home. Ideally you should be in a position to absorb the repayment increases into your budget as and when they occur.

Ensure you budget for all the expenses that come with owning a home. Again, planning and budgeting properly can help you to make informed decisions.

Instagram: "My mission this weekend is to avoid 1 tequila, 2 tequila, 3 tequila, poor. #OneRandMan"



What key advice and assistance have you given the OneRandMan

The true power of this experiment is the fact that it is a very real, authentic experience. Giving the OneRandMan advice or guiding his spending/saving during this month would remove this value.

Having said that, we are observing closely and offering insights from experts following each episode - these videos can also be found on the Sanlam YouTube channel. We will also provide deeper lessons and insights based on this experiment in August 2014.  


Consider yourself a savings hero? Or just have something on your mind? Add your voice to our Savings Issue:

* Write a guest post
* Share a personal story
* Ask the experts

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.90
+0.2%
Rand - Pound
23.86
+0.2%
Rand - Euro
20.36
+0.3%
Rand - Aus dollar
12.31
+0.2%
Rand - Yen
0.12
+0.2%
Platinum
908.05
0.0%
Palladium
1,014.94
0.0%
Gold
2,232.75
-0.0%
Silver
24.95
-0.1%
Brent Crude
87.00
+1.8%
Top 40
68,346
0.0%
All Share
74,536
0.0%
Resource 10
57,251
0.0%
Industrial 25
103,936
0.0%
Financial 15
16,502
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders