How to budget like Pravin

PF 27Feb mybudgetIOL PF Illustration: Colin Daniel

“There’s no doubt we’re in a crisis… and we need to do extraordinary things.” These were the words of the Finance Minister when unpacking his Budget for the media this week. With the average South African becoming poorer, his words will resonate with most people. It might be time to sit your family down to address your financial crisis.

Millions of South Africans find themselves in financial crisis because of their failure to budget. Consumer credit records prove it: 45 percent of credit-active consumers in South Africa are in arrears on at least one account or have a debt judgment against them. A failure to budget will land you in a debt spiral.

People also get into more debt than they can handle because of unforeseen events – like a big expense they can’t cover or an interest rate hike. This also indicates a failure to budget properly.

Niel Fourie, public policy actuary at the Actuarial Society of South Africa, says now is an opportune time to assess your household budget.

“Without a clear overview of how you spend your money every month and how much debt you are really servicing, you will not be able to identify and address your most expensive debts, such as credit card or vehicle repayments.”

By curbing your spending and prioritising paying off debt, you can “shock proof” your finances against further interest rate hikes, he says.

So what are the elements of a good budget? Our National Budget is based on an economic outlook, a credible fiscal policy that identifies risks, a debt outlook and a spending plan. We also need savings and investments in order to grow our economy and reduce the cost of borrowing.

WHAT'S YOUR ECONOMIC OUTLOOK?

An economic outlook is a forecast of how the economy is expected to perform in the coming year. It could include expectations for inflation, what interest rates might do and the expected level of unemployment. It’s important to have one because it contextualises your budget and helps you prepare for what might lie ahead.

Gerald Mwandiambira, the acting chief executive of the South African Savings Institute, says your personal economy is your life. “Within your life you manage your expenses and work in an environment that is impacted by macro- economic forces.” Having an understanding of these forces and how they affect your finances will help you plan and mitigate risks where possible.

With the inflation rate for January coming in at a worse-than-expected 6.2 percent year on year, the Reserve Bank’s Monetary Policy Committee may opt to raise interest rates at next month’s meeting, Jason Muscat, an industry economist at First National Bank (FNB), says.

“Food and transport costs in particular are driving the number higher, a trend we expect to continue given the drought, slightly higher oil prices and persistent currency weakness,” Muscat says.

In stressful financial times such as these, you need to scrutinise your budget all the more closely, Ester Ochse, the head of financial advisory at FNB, says. Because of the rising cost of living, financial discipline is crucial, Ochse says, and recommends enlisting the services of a qualified financial adviser. “Knee-jerk cost-cutting could have unintended consequences; proper financial analysis is necessary,” she says.

WHAT'S YOUR FISCAL POLICY?

A fiscal policy can be simplistically defined as a government’s spending policy. Our government’s policy is to “lower the expenditure ceiling, bolster tax revenues and actively manage risks emanating from state-owned companies and restrict the growth of compensation budgets [government’s salary bill]”. All of these measures are aimed at reducing the budget deficit.

If you have a budget deficit it means your spending exceeds your income. Like Gordhan, you need a plan to reduce this deficit and stabilise your debt. There’s only one way to do this: cut back on your spending. This means eliminating wasteful expenditure as well as being more prudent when spending on essentials.

“In order to cut a deficit, you need to identify your needs versus your wants. Needs are expenses that cannot be avoided, such as your mortgage bond payment, while wants are things that you can do without for a while. These can include a satellite package, gym memberships and magazine subscriptions,” Mwandiambira says.

Even with your necessary expenses, you have a measure of control over what you spend. For example, you can shop around for better deals and cut down on fuel expenses by planning your travel routes and times. “Some expenses, like insurance, can be brought down through consolidation. It’s best to have a single policy for home, car and personal insurance. Even if you have consolidated already, you should shop around for a better deal annually,” he says.

WHAT'S YOUR DEBT OUTLOOK?

In macro-economic terms, a debt outlook is how much a country’s debt payments may increase. If a credit ratings downgrade occurs, South Africa will have to pay more interest on its debts. This will increase the country’s payments, and taxes may have to rise to accommodate this, Mwandiambira says.

“On a personal level, your debt outlook is how much your payments may rise if interest rates rise. You should sit down with your Certified Financial Planning professional and know in rand terms how much all your debts may increase if interest rates go up by a quarter of a percent, or half a percent. You will then know how much cash you must always leave spare in your budget, in case the worst should occur. If you have no clue as to how much your debt outlook may change, you cannot plan ahead.”

The cost of servicing debt is our government’s fastest-growing expense. For every rand earned by the state, 12 cents is spent on interest. Do you know how much you spend every month on servicing debt? And are you falling behind in servicing your debt? If so, you will ultimately pay more for credit. It will result in a “downgrading” of your personal credit score – which is how credit bureaus rate your risk as a borrower. The lower your score, the more you pay for credit.

DO YOU HAVE A SPENDING PLAN?

In terms of our government’s consolidated spending plan, the state’s wage bill will be cut and government has had to reprioritise to fund special needs, including drought relief.

Your spending plan may need to change in light of a deteriorating economy. For example, you might want to hold off on your plans to renovate your home, or reconsider sending your child to a private school next year.

DO YOU HAVE SAVINGS?

Saving helps grow our economy and reduce our reliance on foreign investment, Mwandiambira says. “If you’re not saving, you’re always at the mercy of events around you and never in control of your finances. Saving allows you to have a measure of control and confidence in your affairs and prepares you for unforeseen events.”

The Investec GIBS Savings Index launched last month gave South Africa a rating of 63 out of 100, Mwandiambira says. “This is not good enough to grow our economy; we’re saving only 16 percent of all we produce, which is our gross domestic product (GDP). To achieve economic growth of five percent, companies, individuals and government must collectively save at least 28 percent of GDP. For China to achieve its enviable growth, it was saving 40 percent of GDP.”

Although more South Africans are trying to save, many are too overwhelmed by debt to save, Mwandiambira says. “It’s important to save, even while servicing debt.” He says you should never sacrifice saving to pay debt. If you suddenly lose your job, the debt payments you’ve been making religiously will amount to nothing if you don’t have savings to cushion the blow.

The importance of an emergency fund can’t be overstated. When there is no margin in your budget and the inevitable happens – your car needs a service or your geyser bursts – you will find yourself on the brink of financial ruin.

“If you struggle to save, stokvels and group savings clubs allow you to save with encouragement from peers,” Mwandiambira says.


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