By Debra Slabber, CFA®, Business Development Manager, Morningstar Investment Management South Africa
In South Africa, 1 September is known as Spring Day, signalling the approaching change in season from winter to summer. This time of year is known to act as a trigger for people to tackle their annual “spring cleaning” ritual – they get rid of old or unused items, deep clean the house and do some general re-organising. This year has proven to be anything but ordinary and instead of doing this usual ‘spring clean’ ritual – I would like to challenge South Africans to use this opportunity to take stock, tidy up and spring clean your finances.
For the year to date, South Africans have faced extremely difficult circumstances from both a financial as well as a health and emotional perspective. Now more than ever, it is time to dust off your financial plan and re-assess if it requires some tidying-up.
Where to start?
In the words of Creighton Abrams: “When eating an elephant, take one bite at a time.” The saying refers to the figurative advice about how to face a huge, overwhelming task. By breaking a large task up into smaller tasks, it becomes more manageable to complete. It is no different when you consider tackling the spring cleaning of your finances – the important thing is just to start.
A good starting point is to take stock and make a list of all your assets, liabilities, monthly income, and monthly expenses. That will give you a good indication of what your balance sheet and income statement look like.
· Assets refer to anything that you own, for example, property, investments in shares, unit trusts and cash in the bank.
· Liabilities refer to your debt, outstanding payments and loans – for example, your home loan/bond, car loans, student loans, credit card debt, etc.
· Income can include your salary, rental income, interest, and dividends earned.
· Expenses include all your fixed expenses – for example insurance payments, levies, and medical aid, as well as variable expenses (like groceries and electricity).
Budget, budget, budget
Once you have a clear picture of what your expenses are every month, it is much easier to set up a realistic budget. There are many budgeting templates available online if you get stuck. (Here’s an example of a Budget Worksheet our global team created.)
The key to setting up a successful budget – even for a beginner – is that you have to monitor how far you are deviating from your budget. Keeping track of your monthly income and expenses against your budget will give you a much better view of where your money is going, show you where you are overspending and/or where you are saving. That brings me to the next point…
Spend what is left after saving
Now that you have observed your income versus expenses, you should have a good idea of how you are spending your money. When it comes to spending, Warren Buffett’s words will always ring true – “Don’t save what is left after spending but spend what is left after saving”.
Saving for a happy retirement or a rainy day may seem like an obvious and easy concept to grasp but it is much harder to put into practice. If you are someone that struggles to be disciplined when it comes to saving, rather set up a monthly debit order to an investment account and let it do the work for you. That way you are forcing yourself to save before you are tempted to spend the money.
Here you can use your annual allowance of R36,000 for a tax-free savings contribution and/or you can always increase your retirement annuity contribution as well. It is important to note that, no matter how small, the key is to start and stick to the habit of saving. For example, you can save R200 a month, all you need to sacrifice is cutting back on buying roughly two coffees a week.
Have you invested appropriately for your risk profile?
As we enter new or different phases in our lives, our risk profiles can change. It is a good idea to take stock of all your investments and do an asset allocation check on an annual basis. Have you invested appropriately for your risk tolerance, time horizon, age and financial circumstances? Do you have enough offshore exposure? Perhaps you have been de-risking too much or taking too much risk. Speak to your financial adviser to adjust your portfolio to reflect your risk profile correctly.
A small word that often evokes big emotions is ‘tax’. Unfortunately, only two things in life are certain: death and taxes. Whether we choose to talk about it or not, the reality is that tax is inevitable. What you can do as part of your spring-cleaning exercise is to get a professional to assess whether your financial plan is structured in the most tax-efficient way possible.
Insurance and risk policies
Perhaps part of reviewing your financial plan should be to do a check to ensure that all your short-term insurance, medical aid and other policies (for instance life cover, funeral cover, disability cover etc.) are still relevant and accurately reflect details about your circumstances and beneficiaries. Consider if it is time to add or remove policies.
Consider your emotional well-being as well
Most definitions of financial health are very one-sided. It often only focuses on economic or financial stability. Ignoring your emotional well-being could be a recipe for disaster. Even investors with enough assets to withstand any reasonable economic shock can be anxious about their finances, which can cause behavioural problems and overall dissatisfaction with their finances. On the other end of the spectrum, some investors aren’t at a good place economically but still spend carelessly, ignoring the ramifications on their financial plan. For a person to be truly financially healthy, they must find a balance between economic stability and emotional well-being.
Being financially healthy is not just about having enough money to cover your expenses—it’s also about feeling emotionally at ease with your finances. People who feel empowered in their financial lives also experience more joy, peace, satisfaction, and pride concerning their finances.
It is recommended that you review your financial plan with your financial adviser at least once a year (barring any life-changing events that might take place in between, such as getting married, having a child, losing your income etc.). If you haven’t done so in a while, don’t lean into the temptation to bury your head in the sand and ignore the issues that might exist – the solution is often more attainable than you think.
Let’s try this Spring to not only clean out our cupboards, but also our finances. Why not make a mental note to earmark Spring Day as your annual reminder to tackle your money maintenance going forward.