Some financial mistakes offer lessons we can learn from, whilst others come with long-term consequences. Financial blunders can be painful but if you make them (or observe them around you) be sure to turn the lessons into better financial practices.
Most South Africans, have become accustomed to economic uncertainty and change. Unfortunately, this means many of us have become escapists or denialists when it comes to money matters.
The reality is that financial well-being is often only realised through a conscious decision to take control of your finances. By identifying your actual and potential problem areas, and using the tools available to tackle you, you enable a more positive financial future with a brighter outcome.
Six financial mistakes to learn from:
Not protecting my income
“I was confident that my career would take off quickly and I expected to land my dream job in no time. Imagine my shock when I got retrenched! I wished I had acted on my financial advisor’s recommendation to take out income protection with retrenchment cover. I had no income while I was looking for a job and had to rely on family members to get me through this difficult time,” says Steven*, an accountant in his 30s from Randburg.
Postponing planning for the future
“When I discovered I was pregnant, I promised myself I would start saving from the day the baby was born, so that we would have enough money for her education. However, with a baby comes unexpected expenses and I continued to delay savings; I kept thinking I still had time. The years flew by and despite my daughter’s dream to study chemical engineering I cannot afford to send her to varsity – my husband and I are 60 years old and already over R300 000 in debt,” says Amanda*, store manager and mother of a 25-year-old.
Straying from my budget
“Although I had a budget in place, I spent more than I earned every month and kept telling myself that I would double my savings contribution the following month. This became increasingly difficult and eventually I was unable to get by without my credit card and overdraft. I ended up being saddled with thousands of rands of debt and no savings to deal with it,” says Julia*, a mother in her late 20s from Johannesburg.
Many of us tend to over-estimate our potential to exponentially increase our efforts or contributions in the future, to make up for our current financial mistakes or spending habits. The reality is that this often simply reinforces bad habits and compromises our future financial selves greatly in the process. In the last year, 52% of South African metro working households found (at least once) that their income did not cover their living costs. The key is to create a budget and stick to it. Peace of mind, together with achieving more of your goals through conscious saving, is the reward!
Buying unnecessary items to stay on-trend
“I love keeping up with the trends and owning the latest fashions, but my taste for the flashier things in life has caused me to spend big and get into debt to fund my lifestyle. A few months ago I was reflecting on this and realised that the amount of money I’ve spent on nice things could have been used more wisely, like saving up for a deposit on a new home or a dream holiday in Spain!” says Thembi*, a young working professional from Soweto.
Even if we don’t like to admit it, many of us still subscribe to maintaining a relative image of success. Living beyond our means, however, can result in expensive debt that snowballs, making it even more difficult to get rid of. The situation at present is that working metropolitan South Africans are allocating on average 16% of their monthly income to paying back debt. This doesn’t mean luxury purchases are off the table, but rather that they should be funded through savings or discretionary money, and avoided if they need to be purchased through interest-bearing debt.
Cashing in my retirement savings
“Early on in my working career, I changed jobs every few years and every time I moved to a new company, I cashed out my retirement and used it, once for a trip overseas another time for a new car instead of reinvesting or preserving the money. Years later, I’ve settled into a stable job, but I now have to save so much more toward my retirement because I have less time to save. If I had preserved the savings I had already accumulated, I would have been so much better prepared for retirement,” says Johan*, a professional in his mid-40s from Cape Town.
Cashing out your savings will set you back more substantially than you realise and could result in you needing to contribute up to double when you reach your late 30s or early 40s, depending on your planned retirement age. A significant advantage of starting to save early is that you benefit from the power of compound interest.
Ignoring good advice
“When I was in my 20s I started contributing monthly towards a stokvel. Although I was advised to also put more formal savings plans in place, I thought I knew better, and continued with my informal savings. When I look back and think of all the interest and returns that I could have earned on my monthly contribution, I wish I had also considered other savings plans with a strong growth focus sooner,” says Sipho, a waiter from KwaZulu-Natal.
Priya Naicker is advice manager at Old Mutual Personal Finance.
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