Avoid the ‘January hangover’

Sohini Munsamy, the head of EB consulting at 10X Investments discusses the “January hangover” with Ryk van Niekerk on Moneyweb.

RYK VAN NIEKERK: We are in the holiday season and it’s always the time of the year when bonuses are paid and people start to spend as if there is no tomorrow. You recently wrote a very good article on this behaviour, and you gave some excellent tips on how to avoid what you term a subsequent financial hangover in January.

Now I like that term, but how do people avoid that financial hangover?

SOHINI MUNSAMY: A very good question. It is most certainly quite a difficult question for a lot of people to face. And maybe just to start off with, you mentioned the end-of-the-year bonuses that do get paid.

As 2015 starts to wind down and people prepare for their annual holidays, the focus tends to move invariably on to spending rather than saving, and many employers do in fact pay a bonus or a 13th cheque, which most people will probably need to offset the higher seasonal expenses.

But it’s very important as well to reserve some of this money for the higher January credit-card bill that could be expected. The majority of South Africans would have a much longer gap between their December and their January salaries than they normally would have throughout the course of a year. That tends to put a strain on resources for an individual and from a family household perspective. So it’s important to reserve some of that money for January when you expect maybe a bit of a shortfall in terms of your personal debt. And also for the payment of school fees, for example. So there is usually quite a big cash outlay that has to happen at the beginning of the year.

And another one that perhaps a lot of individuals don’t necessarily think of is to pump money into their company retirement fund if the employer hasn’t done that already.

RYK VAN NIEKERK: But you get the bonus in your account. It looks really nice, you’ve got a good, fat piece of cash sitting there and it’s difficult not to spend it. Do you have any suggestions? Do you just leave it there until January, when you need it, or is there any way you can just park it somewhere where you can’t get your hands on it during December?

SOHINI MUNSAMY: I think it’s quite a difficult one, especially from the perspective that the money is there, it’s available and there are plenty of things to spend it on. I think during the festive season we are constantly inundated with marketing campaigns, the sales, the likes of your Black Fridays and your online shopping campaigns at this time of the year.

And I think it’s also quite an emotional thing, because the holidays tend to be spent with family. We want to spoil ourselves for having worked throughout the course of the year, and we want to spoil our families as well.

And while of course it’s okay to indulge, I think one works hard throughout the course of the year and deserves it, it’s also just as important to commit to a financial plan for the year ahead so that, like you say, that financial hangover doesn’t spill over into the new year.

RYK VAN NIEKERK: Budgeting is always a favourite topic at this time of year, because you need to sit down and look at your finances, you need to look at your income, your need to look at your expenses. How do you go about drawing up the best possible budget?

SOHINI MUNSAMY: I think that the beginning of the new year is a good time to do your cash flow and your budget for the year. Above your normal living expenses, which will likely increase with inflation, you need to also factor in abnormal items such as things like debt repayments, school fees – like I said, sort of abnormal medical procedures or holiday booking or things like that.

I think the goal really, Ryk, is just to smooth your consumption over the course of the year so that your total annual spending, including these sort of abnormal items, remains within your annual income. So if you do anticipate a big outlay, you need to discipline yourself really to cut back on your discretionary spending in other months surrounding that.

And the point is really that you shouldn’t have to dig into your long-term savings in order to fund the short-term debts which might become permanent if you don’t have the income to repay them.

RYK VAN NIEKERK: There is an SMS here: “Who has time to budget?” It is really critical for you to go and sit down. It’s not a nice exercise, because you will see that you need to cut back some of the spending on going to eat out or going to the movies. It is not a nice experience, but it’s still critical to do it.

SOHINI MUNSAMY: Actually budgeting I think has a bad reputation in terms of being quite a tedious task for people, but I think you do need to allocate the time. And hopefully at this time of the year most of us should have a little bit of time at our disposal. I think the important part is that the benefit that you get out of spending that time is of course the benefit of having your budget, and having the discipline to follow through with it. That time might become very well spent in terms of the budgeting.

RYK VAN NIEKERK: It’s also always good to have a bit of cash stashed away somewhere as an emergency fund. Not everybody can do it. But what is the best way for people to build up, say, a cash amount that they could use for an emergency when it comes?

SOHINI MUNSAMY: I think the best thing to do is to force oneself to average that amount of money. So I think when doing your monthly budget it’s important to have a look at what kind of disposable income there is, if any, and then to make an allowance for that. And then create a scenario where, for example, there is a monthly debit order that goes into a savings account, like any other expense or any other bill that you pay without sort of looking at it. It goes off on a month-to-month basis and gets invested in, for example, some sort of interest-bearing account so that one day, when you need it, it’s there and hopefully has accumulated a bit of interest during that period as well.

RYK VAN NIEKERK: There is another SMS: “Why would you pay school fees in December?”

SOHINI MUNSAMY: I was talking about the beginning of next year.

RYK VAN NIEKERK: But the big thing is, if you pay your school fees in advance, six months or a year in advance you will actually get a discount and it will improve your cash flow during that period, because you don’t then have to pay monthly school fees.

SOHINI MUNSAMY: Absolutely. The sooner you do it the better, and certainly I think January is quite a strained month for anyone to have to budget for that. So, as you say, the sooner the better. Any discount should be welcomed and as far as possible you should try to aim to cash in on that.

RYK VAN NIEKERK: Savings – that’s always a big topic of discussion. A lot of people feel that they just do not get enough money. Their income is just not high enough for them to warrant a savings plan. How should people approach that?

SOHINI MUNSAMY: It’s quite a debate. Just with regard to the disposable income that people have at their disposal on a monthly basis – I think I’ll probably refer to my personal experience in the corporate retirement funds, A lot of employers try to make their company retirement funds more attractive by offering lower contribution rates so that people have more disposable income, which is more valuable to them at that point in time, especially younger people for whom retirement is quite a far thought.

But most certainly I think the point is that the less you contribute, the less you’ll have one day at the end of it. So it’s savings in the short term but it’s a big investment for the future.

RYK VAN NIEKERK: Another SMS from Joe says that people should also budget for interest-rate hikes next year, which will increase their repayments on their homes and cars.

SOHINI MUNSAMY: Absolutely. I think it’s quite a topic at the moment, our weakening currency. We know that inflation tends to have a negative impact on inflation and what follows from that is a rise in the interest rates. And that tends to have the biggest impact on those who are indebted in their personal capacity. That’s a very good comment. So I certainly agree with that.

RYK VAN NIEKERK: But it’s not only your cars and your property. It’s actually the really expensive interest you find on credit cards or store cards or personal loans.

SOHINI MUNSAMY: That’s very important and I think in that’s sense one should certainly try to reduce one’s personal debt as far as possible, especially with those credit cards. Like you say, the interest on the credit cards tends to be really detrimental to one’s personal financial situation.

And in terms of just advising people to really try to reduce their personal debt, what it says in the article is if your belt feels a little bit tight, the answer is not necessarily to loosen it by extending your credit limit, but rather to cut back on your lifestyle until it starts to feel a bit more comfortable again. It comes back to what we’ve said a couple of times now – it’s about discipline.

RYK VAN NIEKERK: Maybe you should use a part of your bonus to pay off some debt. Absolutely.

Another good habit or good exercise to perform is to sit down and look at your will, and make sure it’s updated.

SOHINI MUNSAMY: Very important. I think in terms of annual financial planning, there should be a point in time during the year where you update. For example, if you’ve got a company retirement fund or a life insurance benefit that needs a nomination or beneficiary form to be updated, one has to review that on an annual basis to ensure that as and when circumstances change – in your personal circumstances you may had had a child during the course of the year, you may have had some sort of experiences – that would require the update of your nomination form and your will. So it’s important to plan that when looking over the course of the year, but at least once a year you must review that document.

RYK VAN NIEKERK: Lindiwe sends a quite lengthy SMS and she says she couldn’t afford her existing medical aid and she started to shop around and found that medical-aid plans are not that similar. You can actually get cheaper medical aid if you shop round.

SOHINI MUNSAMY: Absolutely. I think with medial aids there is quite a variance in the types of products that you can have available and it comes down to what is affordable on a monthly basis versus what you actually require and what you actually need for your personal circumstances. You may be a single person who doesn’t get sick very often and you may want to take out, for example, a hospital plan or you could be someone who has small children and who needs the savings plan. So it comes down to the individual and there is quite big variance in terms of what you can pay for the add-on benefits or not.

RYK VAN NIEKERK: The key here is to sit down and look at your income, look at your expenses. I have kids now, but when I started working I had the most money I ever had. The salary did increase as I got older, but just after payday when I’ve paid my bills there is not a lot left. You need to sit down and look where you can save – and that will stand you in very good stead.

SOHINI MUNSAMY: I think it’s about being proactive. So in a lot of instances we are reactive, struggling to make ends meet, especially when expenses are high and you have young children. I think most importantly it’s about living within your means, so really taking a long, hard look at that list of expenses. And if it feels a bit tight at the end of the month, really have a decisive view at that list of expenses and see what’s necessary, what’s needed, and where are the spaces that one can cut back in order to make things a lot more comfortable/

RYK VAN NIEKERK: Not everybody can come out on or spend the money they have within their budget. A lot of people battle to actually make that budget balance and at the end of the month have something left over in the bank.

SOHINI MUNSAMY: I think, Ryk, there are different ways in which we spend money. There are the expenses that we have on a monthly basis that we might be aware of, but also I think people are maybe less aware of, for example, the kind of fees that they pay, for example, on their investment products. That’s also something that costs money and can be looked at. Obviously the lower the fees you pay, the more you have in the long run.

RYK VAN NIEKERK: Unfortunately that is all we have time for tonight. Thank you, Sohini Munsamy, head of EB Consulting at 10x investments.