We all make money mistakes and in good times we can still make up for them, but in the difficult economic environment we currently live in, money mistakes can have serious consequences.
The problem for most consumers is that the more economically depressed we become, the more we need some retail therapy to make us feel we are still in control. And retailers know that the average consumer is not immune to the temptations lining their shelves and the minute we see a potential pick-me-up, all good intentions are thrown out of the window and we often find ourselves in a worse financial situation than before.
These are some of our worst money mistakes:
- Spending more than we earn
- Putting off financial planning
- Not saving for emergencies
- Postponing retirement saving until later in life
- Taking a long time to pay off high-interest debt
- Buying a new car without considering used options
- Not buying enough insurance coverage
- Not monitoring our credit scores and credit reports
- Not having a will.
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Spending more than you earn
Claire Klassen, consumer financial education specialist at Momentum Metropolitan, teaches young people how to avoid money mistakes every day and she says South Africans are deeply in debt, with almost half of them unable to pay their bills in full which means spending more than you earn is a problem in South Africa.
“It all boils down to biting off more than you can chew type of thinking. If I earn R20 000 after deductions, there is no way I will be able to sustainably continue paying R25 000 in monthly expenses, using my net income alone,” says.
Having no emergency fund
South Africans have a bad reputation when it comes to savings, but how important is it to have an emergency fund and how much should be in it? Klassen says statistics are bleak when it comes to South African individuals and saving and they would much rather rely on family members, children, siblings, or extended family in times of need.
“It is extremely vital to have an emergency account and load shedding is a real example of emergency situations hanging over our heads, with geysers and fridges short-circuiting, tyres damaged by driving in the dark on roads riddled with potholes, because heavy vehicles carrying loads of goods that were supposed to be distributed by rail, damage the road.”
The risks associated with being a South African means we need to think about how to prepare ourselves for unplanned expenses, she says.
“The best way to do this is to have an emergency fund, holding at least 3 to 6 months’ worth of expenses in it. This one thing done right and done regularly, will ensure that you are protected from unplanned expenses that would otherwise cripple you financially.”
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Taking your savings for a holiday
Will it then be a money mistake to use money from your investments or emergency fund to pay for a holiday? It is after all money you saved.
Klassen says the reason why you have an emergency fund should determine how you spend that money.
“If for some reason you never have emergencies or you can go an entire without having to dip into your savings, then yes feel free to access the money, but you must always ensure that you leave at least 3 to 6 months in your emergency savings account.”
Her advice is to let the money work for you.
“If you need a break, think about this: will I need this money in three months’ time? Especially since I am not a fortune teller, it is not possible to see into future. I do not really know whether I will need my emergency fund to settle an emergency payment.“
She says the same goes for money from your investments.
“If at any point you feel that your investments are a waste of time because you cannot see the immediate value, then you need to consult a professional financial adviser.”
If you have enough funds to settle your debit from your income and a plan of action for your retirement, you could dip into your investment.
“Ask yourself when deciding to access your investment: can you get back into the market using the same unit trust and class or can you find a replacement that has a similar spread of risk?”
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Saving for retirement
And then there is saving for retirement. Should you really start saving for retirement when you receive your first pay check? Klassen says we should know by now that being a pensioner in South Africa without having saved for retirement is a risky move.
“It is imperative because you have to prepare yourself for the time when you can no longer generate or earn an income to pay for your living expenses. As a retired person in South Africa without the security of compound interest causing a comfortable lump sum from which I will be able to live, paid to me on a monthly basis via a living annuity, I will have to access the public health system or apply for a Sassa grant.”
Paying off expensive debt
Taking a long time to pay off expensive debt is also a money mistake and Klassen says if you do not tightly budget and control your spending so that you do not have any debt with high interest, you will bleed to death with your debt-to-income ratio.
To calculate your debt-to-income ratio, add up all your expenses and all your income. Then divide the total expenses by the total income and convert the ratio to a percentage. If it exceeds 36%, you are in financial trouble.
“If you do not pay off your debt with the highest interest first, you end up owing more money than you should.”
Not buying enough insurance is also a money mistake. Klassen says the value of your assets decides the amount of insurance you need and your financial adviser can help you to work out exactly what you need. “Insurance must cover what is relevant to your personal and business circumstances.”
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Credit reports and credit scores
Some consumers make the mistake of not monitoring your credit scores and credit reports.
“You are an individual who is economically active and as a result your credit history is determined by your financial behaviour. A record is then kept of your behaviour towards money and credit.”
Klassen says you must be aware of your financial management or rather how much money you really owe and whom you really owe.
“We really need to sit down and take the time to access the resources that are available to us, because there is too much at risk to act differently.”
Living without an investment strategy or not sticking to it is another money mistake, especially if you do not have enough money to pay your bills. Klassen says investing while you still have outstanding debt is like going for seconds when you have not finished your meal.
“An investment strategy is the natural progression of your financial maturity. At a certain level of income, you will have more disposable income available and if you choose to spend your money on frivolous pursuits instead of paying off debts sooner, you will not get to enjoy the additional income or disposable income amount.”
Even not having a will is a money mistake, although you have so little money that there is nothing to inherit. Klassen says if you die without a will, it will put even more pressure on the people you leave behind, even if there is nothing to inherit.
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