You don’t need a doctorate in economics to experience financial security. It’s the small and consistent decisions throughout the year that gradually grow or reduce your financial options.
Awareness of where your money flows each month forms the foundation to a well-crafted budget. Knowing which recurring living expenses and loan payments are essential, each month can help you prioritise your day to night activities. Freelancers especially need to ensure they cover their basic needs to keep out of the red when their cash flow varies.
Secure your base
Listing your fixed costs such as rent or your mortgage, cell phone contract, insurance, loans, and car instalments is a great place to start. Awareness of your total fixed costs can help you strategically segment incoming funds, and savings towards an emergency fund. Working towards saving 3-6 months of your fixed costs creates a financial buffer to relieve the stress of bills stacking up and debit orders bouncing.
Living expenses such as groceries, electricity and transportation costs vary through the year, and this is where Budgeting can also make a difference.
Categorise your cash
Many families choose to use the ‘envelope method’ where cash amounts are put aside in separate envelopes to manage weekly groceries and other household expenses.
Some use this exclusively or in parallel with a credit or store card to group all small, regular payments for rewards. It’s essential to understand the effect your spending and lending habits can have on your credit score. Your payment history primarily influences your credit score.
Saving money is a way of paying yourself in the future, especially when factoring in compound interest. Paying your loans off first, however, will prevent high-interest rates from dissolving your hard-earned savings. Here’s an example of how compound interest on debt can quickly spiral out of control.
Resolving your debts by clearing the loans with the highest interest rates first can help reduce the effects of compound interest in the long run. In a worst-case scenario, ensure you can at least pay the interest on your credit card until you can pay it in full.
Get your priorities on track
Your income is a limited resource. That’s why if your lifestyle habits hover above your income, it’s a risk to make debt – to keep up with flashy trends.
Buying something you cannot afford and don’t need makes little sense when paying compound interest on it. Once again, awareness of your basic needs minimises your likelihood to spend impulsively.
There are many techniques out there to clear your debt. Resolving your debts with the most significant interest rates first can reduce the effects of compound interest in the long run. In a worst-case scenario, ensure you can at least pay the interest on your credit card until you can pay it off in full.
Living in debt can feel like you’re treading water each day, especially with the high interest rates and an annual inflation rate of around 4.5% in South Africa.
Budgeting gives you flexibility. By knowing where you can compromise on costs, and what those costs are, you can identify better ways to save, invest and build the life of your dreams.
