Five Steps To Financial Fitness

Janu-worry and Febru-worry have finally passed and you can breathe a small sigh of relief. But how great would it be if in 2020, the start of the new year wasn’t even a huge financial strain? Imagine knowing your financial situation inside out and being able to strategise around it. The good news is that you can start now and be financially fit by the end of the year easily! Developing good financial habits can help you to save, manage your money properly, and plan in the long term for retirement, rainy days, and expensive months rather than often finding yourself taken by surprise when it comes to the finances.

Step 1: Analyse your spending

Being aware of your finances is the first step to financial freedom. If you can’t give a ballpark figure for what you spend on, for example, petrol or groceries per month then it is very hard to know where you can save or economise.

It doesn’t need to be a long process. Simply print off your bank statements and look at your spending habits over the last few months and calculate your average spending in various categories. These might be house, car, kids, groceries, and entertainment.  More often than not, people are surprised by how much they spend in at least one of these categories.

Step 2: Draw Up A Budget

Now that you know what you are spending, it’s time to think about what you should be spending. Your budget should allocate a certain amount per category to be spent, making sure that each month you leave a little bit over to put away for unexpected expenses. Hopefully the spending analysis has revealed that by making smarter choices and compromising on a few smaller things, you could save money on groceries or entertainment, for example.

The budget isn’t set in stone and if you consistently overspend in one category but underspend in another, you can always shuffle around the amounts a bit. Mostly, it’s there so that you are responsible with your money and know exactly what and where you’re spending your hard-earned rands.

Step 3: Pay Off Your Most Expensive Debt

Typically, your most expensive debts will be things like credit cards and store cards. You obviously owe a lesser amount than you do on your car but because they have really high interest rates, falling behind on payments can cost you dearly. If you have these kinds of debts, it’s best to pay them off as soon as you can before moving your attention over to longer-term debts like your bond.

Step 4: Short, Medium, and Long Term Goals

Look at your future goals.

If you don’t have one already, an emergency fund is probably the most important short term goal. Nobody wants to consider it, but if you lose your job, write off your car or have to pay a really expensive medical bill, you don’t want to end up in further debt just trying to get back on your feet. Save hard for a few months to try and get an emergency fund together – ideally, keep this in a separate savings account so that you’re not tempted to dip into it.

Your medium term goals are typically more flexible, but often revolve around financial stability and ‘want’ purchases. A house would be an obvious one, but more luxury purchases often come up here too. Perhaps within five years you want to travel overseas with the family or have bought a car for your teenager. To do this, you’ll need to figure out how much you’ll need (e.g. R30 000 for a family holiday in 2022, or R120 000 for a house deposit in 2024) and divide it by the amount of months you have before the deadline you’ve set. Save that amount per month and – hey presto – you’re well on your way to meeting those goals!

Your major long-term goal is of course to have enough for retirement. This means a paid off house and enough in a retirement or pension fund (or in the bank) to cover your living expenses for roughly 30 years after you stop working. Saving early means that you earn more interest, which is why it’s so important to start setting money aside for your retirement as soon as you can. You should aim to save 10 to 15% of your monthly income for this.

Once you’re not living paycheck to paycheck and have made provision for retirement, you can start to think about your finances outside of the immediate need to save. Investing with the help of a financial planner can mean that money isn’t just saved, it’s actively making more money. Some invest through property, others in stock markets, businesses, and other avenues. There’s no way to say what’s best for you, but knowing what is out there and planning ahead is key to being financially fit not just now, but for the rest of your life.

Step 5: Draw Up a Will

The final step in your journey to financial fitness is to draw up a valid Will. Why? It’s important for the future of your loved ones that you’ve left your financial affairs in order should something happen to you. Not just that, but a Will and testament means that you can appoint a guardian of your choosing for your minor children or dependents.

On top of that, your will allows you to specify exactly how you want to divide up your estate. Hopefully, you will have gained a reasonable estate and will have things of value to leave behind; whether cash or assets. Without a Will, the courts will automatically distribute your estate – but this could mean that people you would have liked to leave things to gain very little, or vice versa.