South Africans’ pockets are in pretty dire straits. In addition to the pressure created by increases in basic living expenses, consumer data suggests we are also spending more on non-essential ‘feel good’ purchases including travel and dining out. According to the SpendTrend2023 report, grocery costs have surged, with a nearly 50% increase in spending compared to 2019, which has hit lower-income earners the hardest. When it comes to travel, while volumes are down, there’s been a noticeable spike in spend, especially on domestic travel. Driven by an 80% increase in aviation fuel costs and shrinking airline operations, ticket prices have soared. As a nation, we are also spending more on restaurants and take-aways, driven by the post-COVID return of patrons to restaurants and ongoing loadshedding – statistics show an increase of 60% in the number of people dining out during power outages. These spending patterns reflect both the economic pressures faced by consumers and the lifestyle changes we have had to make in response to the related challenges. With many of us needing to prioritise essentials over life’s little luxuries, re-evaluating our spending patterns is a necessity. A well-structured savings plan can help the shift towards a more sustainable financial strategy. Here’s what to consider:
- Understand your spending habits
The first step in your sustainable savings journey is to understand how you’re currently spending your money. A good place to start is with a review of your bank and credit account statements for the past three months, there are even free online tools that can help with this, and the budgeting process. Have a look at the proportion you’re spending on different kinds of expenses to identify areas of overspending. You can restructure your spending by assessing recurring payments, eliminating anything you don’t need, and streamlining your spending, even just understanding how much of your salary goes where will help. The next step is to build a budget, the split of your income that you want to aim for, and continually track your progress and understand any variations.
How much is too much? Debt counselling experts Octogen suggest the following guidelines for your monthly budget:
- Typically, you should be spending around 35% of your monthly income on household needs; covering essentials like food, utilities, entertainment, and education
- 25% of your monthly spend can go to financial services – insurance costs, medical aid, pensions, and savings products;
- Aim to spend no more than 35% on debt repayments including your mortgage, loans, credit cards, and store accounts;
- Lastly, around 5% should be reserved for emergencies – this is to cater for unforeseen financial crises, not long-term savings.
- Protect your finances with insurance
Unforeseen expenses can significantly impact your savings. The best way to evaluate your insurance policies, is to speak to a qualified financial adviser. Ask your adviser to not only focus on the affordability of your initial premiums, but also take note of potential increases in premiums over the years. The aim is to secure coverage that balances affordability and comprehensiveness, and that can keep up with your changing needs over time without waste or unnecessary costs. When it comes to your life cover, it’s important to ensure sufficient coverage for your different financial needs including your household costs, debts, childcare and healthcare expenses, as well as the unforeseen costs that may arise if you were to become ill or injured, or if you were to pass away.
- Establish an emergency fund
While your short-term and long-term insurance policies may cover some unexpected costs, there are many unforeseen expenses that aren’t funded by insurance. That’s why it’s so vital to build an emergency fund separate from credit facilities. Start with a minimum target, say R10,000, and progressively expand it to cover larger setbacks like job loss or medical emergencies. Prioritise building this fund over settling debts. So, while it’s important to stay up with your debt repayments, it’s best to only start increasing your debt repayments when you’ve put away enough money in your emergency fund.
- Strategically manage debt
Focus on high-interest debt repayments. Consider consolidating debts towards lower interest rates for efficient payments. Try to limit your credit card usage – ideally, it’s best to eliminate credit cards and store cards entirely once you’ve got your debt under control.
- Follow a long-term savings blueprint
Now that you’ve reviewed your expenses, built your emergency fund, managed your debt, and ensured you have the right risk protection, it’s time to embark on your long-term savings journey. Once your emergency fund can cover at least a month’s salary, focus on saving for retirement. Your financial adviser can help you sign up for a retirement annuity. And remember, you can benefit from a tax-free savings account facilitated by the South African government, where you can save a maximum of R36,000 annually, totally tax-free. Follow these steps, and you’ll have a solid savings strategy, paving the way for a financially secure future.
These tips from BrightRock were made possible with the input of personal finance expert Maya Fischer-French.