Living from pay cheque to pay cheque leaves no funds for a ‘rainy day’
We’ve all heard the expression ‘saving for a rainy day’, which suggests a future time of need that may never come. But the reality is nobody can predict the future and by having no extra funds to pay for an unforeseen expense, you leave yourself extremely vulnerable to falling into a debt trap. It’s important to realise that an emergency fund is not only useful to help you pay for unexpected car problems, household emergencies or unexpected hospital bills.According to Payprop’s latest figures, one in four South Africans are failing to keep up with their rent - this is clearly already a struggle.
Given the rising cost of living in South Africa, bank balances that run dry every month could start becoming a regular occurrence, leaving no shelter from, unplanned expenses, never mind big financial emergencies.
Any extra amount saved each month is better than nothing. The key is to break the hand to mouth pattern and it starts with getting a grip on your expenses.
How much is enough?
An emergency fund should ideally have enough savings to cover three times your monthly expenses. This will help you to self-fund day-to-day expenses and meet your monthly debt obligations if you can’t earn an income. While this amount of money might seem like an unrealistic target, a good initial target would be to reduce your expenses to 80% of the income you take home. If you save the other 20% it will take your about a year to build up your emergency fund.
Here are some steps to help you start saving from your currently stretched budget:
Pay yourself first: You’ve heard it before, but are you actually doing it? Put money away for saving as soon as you receive your salary and even better, set up a debit order so a fixed amount goes into a separate savings account automatically.
Reassess your debt to get rid of the bad debt: It’s frightening how few people realise the money they waste each month on debt servicing costs. If you are first going to repay any debt, try to increase the repayment amount. And, if you are struggling to put money away at the moment, the best time to start is when you get an increase.
In addition, start using debt effectively. By this I mean try to stick to good debt (e.g. the bond on your home or your study loan) and use cash for other expenses instead of using credit or store cards.
You pay high interest on short-term debt, so make it a priority to reduce it.
Understand where your money goes: Write down what you’re spend money on for a month and you’ll be surprised at how much insight you get into your spending habits. Split your debit orders into debt repayments, essential expenses and non-essentials (like eating out, take away coffee or subscriptions). You may be able to create room to save once you’ve taken a hard look at your non-essential expenses. You also need to be critical – clothes are essential, but perhaps not those designer labels and you don’t need to buy something just because it’s on sale.
Create a realistic budget to make room for a treat: While you need to make allowance for savings, you also need to budget for things that you enjoy. Otherwise, you run the risk of spending money on such things without actually budgeting for them. At least if you budget for them, you can make adjustments to your other monthly expenses upfront.
The mistake many of us make is to spend a lot of money on little things, which you may not even be able to recall at the end of the month. Rather use your money to save for a real treat.
What can you ditch? Decide which of the non-essentials are important to you and what you are willing to give up. For example, you can skip the morning cappuccino and drink the coffee that’s available at work, bring your own lunch to work, review your cell phone plan and use wifi calling or other social network calling options.
Don’t think of the ‘rainy day’ scenario as an unlikely one. As the cost of living goes up, your ability to cover additional unplanned expenses reduces if you haven’t set aside an emergency fund. Start from your next pay cheque so you can avoid getting into debt when the next ‘rainy day’ comes along.