Avoid short-term debt
Getting into debt is the easiest thing in the world. You log into your bank account and the first thing you see is that you qualify for a R150 000 credit limit. Once you activate that credit card, spending more than you earn is easy. It simply involves remembering your pin and finding awesome stuff to splurge on. However, once you buy something on credit, you end up paying more than what the item costs. If you get to the point where you are living off debt, you pay more for every item you buy.
At this point, it becomes hard to reverse the cycle. Your only two options are earning more, or spending less. This is hard to do once you get accustomed to buying anything you like. So, this year, wipe out that credit and store card debt. Buying that stunning pair of heels is much more rewarding when you do it cash with money you can afford to blow.
Don’t postpone your repayments
During the lockdown period, numerous banks are offering you the option to postpone your repayments. If you don’t have an income or your income has been reduced this makes perfect sense. You don’t want to default on debt while you are trying to survive a pandemic. However, if you do have an income and you are just trying to reduce this month’s cost so you have extra to spend on wine when the stores re-open then it is not a good idea.
The problem is that your outstanding balance is still earning interest. So now your debt is growing without monthly payments to counteract this. In the long-term, you end up paying even more for this debt. This is also applicable when you buy a car but only start paying next year. You want to pay down debt as early as possible.
Manage your money better
The secret to financial health is much simpler than you think. Spend less than you earn. That’s it. If you want to manage your money using financial software, it is up to you. There are numerous options available and you can even use Excel. However, if micromanaging your finances is not for you, just make sure that there is money left in your account at the end of the month.
Then, don’t be tempted to blow it all with the aim of spending every last cent. Save that money in a cheap Retirement Annuity (RA) like the offerings from Sygnia, Outvest, 10X and Easy Equities. I wrote a comparison that you can find here. This will help you get a tax rebate, so you have even more money at the end of next year.
Review what you spend your money on. If your banking cost is too high, switch to a cheaper account or switch banks. If you are spending too much on recurring costs like magazines and gym memberships you don’t use, cancel it. You can even check that you are still being charged competitive rates for things like insurance. Yes, all of this requires you to skip a few Bachelor episodes tonight but in the long run, it is absolutely worth it.
Plan your monthly deductions
Not all monthly payments are created equal. There are payments to reduce your debt and there are payments you make monthly for a service you receive. These should be treated differently in your monthly budget.
There are two forces working against each other. The first is the interest you earn on the money you keep in your savings account or transactional account. The second is the interest you pay on money you owe. Typically the interest you pay is higher than the interest you receive. For this reason, you pay your debt repayments as early in the month as possible.
However, when we are talking about payments made for Netflix subscriptions, gym memberships and insurance, these typically have no interest payment associated with them. In other words, as long as you pay it sometime during the month, you are sorted. These payments should be made as late as possible in the month so you can earn interest on the money in your account. If you, however, know yourself and are well aware that the money will be long gone by the time the deductions go off, this strategy is not for you.
Review your investment fees
The problem with excessive investment fees is that it is such a sneaky way to lose money. You diligently save money every month thinking that it will provide an income in your old age. Then after a few years, you realise everyone else is getting rich, except you.
Review your fees and make sure you are not overpaying for your investments. Since the growth on investments compound, each percentage point you lose to fees is amplified in the long run. For discretionary investments in Exchange-Traded Funds (ETFs), you should be paying no more than 0.6%. Numerous RA providers are charging less than 1%. If you are paying more than this to invest, it is time to move.
File a tax return
Yes, you do not have to submit a tax return if you earn less than R500 000 from a single source. However, if you do not submit a tax return, you forgo the opportunity to claim back some of the money you have already paid to the taxman. There are numerous deductions that you can claim like RA contributions, medical expenses, periods of unemployment, etc. It is always beneficial for you to submit a tax return.
Granted, not everyone wakes up in the morning and knows how to file a tax return, but luckily there are professionals for this. Some of these smell like a lot of work, but all of them are essential to managing your finances better this year. So, make 2020 the year you turn your finances around and sleep better at night.
Article reposted with permission from the Tigers on a Golden Leash blog.