How to be smart about cutting your budget

We all have to cut our budgets to survive in the current financial climate and even government should cut its budget because it does not get enough revenue. However, while government can force us to pay extra taxes to increase its revenue, consumers are not so lucky.

If we do not have enough income, we have to cut, but Leruo Malumo, head of product strategy, development and governance at Santam, says you must be smart when cutting your budget to ensure that you do not suffer in the long run.

Consumer inflation climbed to 3.2% in January and remained the same in February from 3% in December, marking the third consecutive monthly increase, largely driven by increasing housing, utility and food costs.

With the nation focused on strategic spending and the recently proposed VAT increase, Malumo encourages households to optimise their personal budgets. “With the cost of living climbing, small but smart adjustments to your everyday expenses can make a big difference to maintain financial stability.”

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Beware of budget cuts that can leave you vulnerable

Malumo cautions that while it is beneficial to optimise your budget, certain cost-cutting measures can leave you financially vulnerable. “Finding ways to cut your expenses can be a financially empowering exercise, but it is crucial to ensure that the cuts you make today will not result in costly consequences down the line.”

The best way is to optimise and cut, he says. With the introduction of the two-pot retirement system in September last year, concerns for the financial security of future retirees were heightened as South Africans flocked to alleviate their current financial constraints.

However, Malumo points out, yearly withdrawals are like loans you take from your future self at the rate of return you would expect from your investment come retirement stage. “Most people do not realise the actual cost of short-term financial decisions. They think they will have time to make up for the loss but that is the one resource we cannot renew or make more of: time.

“When it is time to trim excess expenses, common targets are purchases such as insurance and like the concerns about early withdrawals from the two-pot system, there is a future cost that you do not consider.”

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Strategic approach to optimise your budget

Malumo encourages a more strategic approach to optimise your insurance along with your budget. “Instead of cancelling insurance to cut costs, review your policies with a financial adviser to ensure you’re not over- or under-insured.

“Adjusting coverage, bundling policies, or exploring discounts can help you save money without sacrificing financial protection. Cutting insurance entirely could leave you exposed to major financial losses in an emergency.”

He says you can cut your budget in these ways to help you save money without putting your long-term financial security at risk:

• Working remotely. Find innovative ways that your insurer may have adapted cover and premiums depending on your risk profile. For example, if you work remotely, you are likely driving less and parking safely at home. Thanks to your risk being lower, this could improve the premiums on your car insurance.
• Bundle up and save. By combining your car and home contents insurance with the same insurer, you are likely to save on premiums.
• Review your policy regularly. Align your cover with your current lifestyle. You could be over- or under-insured. Is the replacement value on your car correct? Have you downscaled and cleaned out some of your home contents? It is critical to ensure you are not underinsured as this could be costly should you need to claim. Spring clean and assess your cover at least once a year to remove the right items from your policy.
• Increase your excess. An increase in your excess payment when you claim usually results in a lower premium. Remember, this means paying more out of your own pocket when you claim and you must check whether this is feasible.
• Pay for the small stuff. Start a rainy-day fund for the small expenses, such as little dings in your car. The longer you stay claim-free, the more likely you are to qualify for sizable premium reductions.

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Rather make budget cuts that empower you

Malumo says every household’s financial situation is different, but the key is to make budget cuts that empower you rather than cuts that expose you to risk. With a strategic approach to budgeting consumers can balance immediate savings with long-term financial resilience.

“South Africans who make informed choices can take advantage of the current economic climate to strengthen their financial well-being while ensuring they remain protected against unforeseen events,” he says.