Caught in pay cheque to pay cheque web

2013-07-02 09:51
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After reading the article Clothes more important than work ethic on Fin24's Savings Issue, Fin24 user Nicolene McLean of Brightrock, decided to share her own story about debt and saving and offer some helpful tips she has learnt along the way. She writes:

After reading the Visa SA Wealth Worries Survey 2013 findings I began to worry about my wealth, a lot.

You’d think that having been raised by a bank manager and a business owner that I would have been hardwired to avoid debt.
It turns out that while the good habits were there, I still found myself hitting the brakes at the start of this year.

My debt wasn’t necessarily unhealthy debt, but it was debt nonetheless. My spending on branded goods, eating out and the latest tech was not that bad at all.

I’d travelled to Turkey for a conference. I’d found a lovely, huge parquet floored flat in Johannesburg. I had filled that flat with a bed, a fridge and furniture. And then I started studying again. It all added up.
I review my budget at least once a week or sometimes more, depending on what I've spent. But when I read the finding that South African household debt is 76.3% of income, I realised that if I didn’t alter my spending behaviour or attitude to finances, I could be caught in the same web.

My debt isn’t as high as 76.3% of my income, but the majority of my income goes to servicing repayments on my car, my medical aid, retirement annuity, rent, sport and paying off my credit card.

I began to panic, because I’m not servicing a savings plan or investing my money. I am caught in the pay cheque to pay cheque web.
What’s worse is that I work for a life insurance company. Do you know what that does to your financial self-esteem?

I am now in super panic mode. Yes, I have taken out a retirement annuity, but I don’t know if that covers me adequately enough.

Every day I read and I write about financial needs and what sort of cover someone like me would need if I were to become temporarily or permanently injured or ill. Or if I were to die.
My major asset, like for most young people, is my income. This is the area where I’m most exposed to risk if I were to become sick or injured, but I don’t have it covered. My emergency plan is to sell my car. My biggest asset.
Like most people my age, I haven’t thought this far. Even though now is the best time to take out life insurance, because I’ve got youth on my side and at least 40 years to go before retirement.

That’s 40 years of investing in cover, which means my premiums won’t be as high as they will be if I look to take out cover when I’m in my mid-40s.
To add even more panic to the situation, I’ve begun to think how 75-year-old me would want to live.

Two minute noodles forever or a healthy meal a day, and the ability to move around and stay young at heart? It is terribly morbid to think like this, but it has kept things in perspective.
Debt can be healthy and unhealthy. Healthy debt is the sort of debt that adds value to your life and is often asset-based such as a student loan or a car.

Unhealthy debt is mostly credit-based and consists of wants and not necessities such as branded gear, technology and thoughtless spending.
But debt is still debt, and keeps you from saving for your future or having the money available to you to invest in financial products such as life insurance cover.

A few things I’ve learnt (the hard way, sometimes) since starting university, graduating, working and beginning studying again:

If you’re going to buy a car – save for it

Even if it is a small percentage of the cost of the car, put down a deposit. It will bring your monthly repayments down.

My father taught me that trick which ended up saving me R300 per month over a six year repayment period.
Insurance is your friend

I was in an accident recently, and because my car was insured, I only had to pay a minimum excess.

It’s amazing what sort of shift occurs in how you drive and treat your car if you think of car insurance as medical aid for your car.
A big nest isn’t always the best

Be reasonable with the space you choose for yourself. Make sure it’s a fit.

I lived in a space that was far too big for me and it meant I paid for the excess space, both in terms of rent and in terms of how much money I spent on filling the space with things I didn’t need.

Be student loan savvy

If you’re studying, a student loan is a great help. There are two things I learnt about taking out a loan:
Don’t repay it all immediately

If you’re paying it back monthly, the interest rate is worked into what you pay back. If you pay it all back when you get a bonus or some money, you’re still paying what you would have paid over your loan period.

Rather have that money go off monthly and save your bonus in a fixed account where it can gather interest.
Every rand helps

Working a few nights at the pub or at the bookshop while you’re studying will help. Put that money away for when you graduate and need to put down a deposit on a flat or a car.
Find a financial role model

Sounds weird, but if you have a career role model, why can’t you have a financial one? Choose someone who will inspire you to make smart choices, or just pick your friends carefully.

Dan Ariely writes in Predictably Irrational, that your circle of influence will determine your behaviour and attitude. Who you spend time with shapes who you become.

If all else fails, make a career in the financial sector, it will shock the socks off of you.
You can’t avoid tax

It will happen to you. Save for it, because it’s always a surprise. This past financial year was my first tax return. It hurt.

The South African Revenue Service (Sars) will find every bit of money you earned. In my tax return, I was hit for work I did as a tutor, a research assistant, a back-end coder, all while I was studying.

If you plan for it now, it won’t hurt as much.

I’d also suggest finding someone to do your tax return for or with you so that you are sure you get it right the first time.

Want vs need
In the end it comes down to want versus need. Will what I want now take away what I need when I’m a 75-year old?

I don’t want to be living on two minutes noodles and lentils in my last years. I got over that the first time I was a student.

I wouldn’t want that for my parents when they retire – so why live like I don’t care about my future needs?

- Fin24

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