Have you ever wondered whether it is worth making extra payments into your Home Loan account? And is there a way to actually calculate these savings?
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It’s hard finding the balance between saving for the future, and living for the now. You don’t want to lose out on the wonderful experiences that life can offer you right now; but at the same time you don’t want to end up in a dreadful financial situation when you’re nearing retirement.
So how does one know how much to spend and how much to save? And how do you decide what you can afford to do now and what will be worth it in the long run?
Well, there is no right answer! These decisions will always be tough and sometimes you’ll make the right choice, and sometimes not. The trick is to try and make the right choice more often than not.
It all starts with assessing your current situation and knowing exactly where you stand with regards any debt you may have, as well as commitments you have made. Debt is a bad thing, so take serious look at this! Also, you need to know exactly what you (and your spouse) bring in each month, and exactly how much you spend. It’s this monthly spending where lots of problems come in. You cannot be spending more than you earn; this will cause unthinkable issues in the future and if that is currently the case, you need to fix it! Just stop spending on non-essential items, don’t eat out, don’t buy things you don’t really need, don’t be influenced by your friends to spend when you cannot actually afford to.
When looking at your monthly expenses, think about the value of “things” versus “experiences”. Let’s say you often buy take-aways, think about what else you could use that money for? Would you enjoy to have a massage or go away for a weekend break? How many take-away meals should you substitute with a home-cooked meal in order to have these other experiences?
It’s not a bad thing to buy take-aways, provided you have budgeted for it. The point I’m trying to make is that money wasted could be used so much better! We all have a limited amount of money we earn each month and every single cent that we spend is worth something! We need to slow down on the spending and be conscious of what we are doing with our money.
So back to the beginning, how do we now how much we should be spending and how much we should be saving? Start with assessing your current situation, create a budget and decide on any financial goals. You may need to tweak your budget to make it all work out, but that’s exactly the point of a budget. Work out what you can spend now in order to achieve what you want to later on.
Challenge: Think before you spend!
We’ve all experienced feeling a little guilty about buying something. Wouldn’t it be great though if you could go shopping and be guilt-free?
Well it’s possible and the solution is so simple and obvious. In fact, you already know what the solution is, you possibly just don’t want to hear it.
Make and stick to a budget!
That’s it! That really is as simple as it is. Once you have worked out how much money you make and spend each month, you simply need to create a budget. This way you can truly go shopping with no guilty feeling. If you have planned to spend say R2,000 per month on clothes – then go for it! (Don’t worry about the currency or figure, it’s just a example) And if you have been saving for some new expensive device, go and enjoy buying it!
A good way to stick to your budget is to use cash. If you arrive at the shopping centre with a set amount of cash in an envelope (and no bank cards), then you really can’t spend any more than you planned to. You will see how the sales and “must-have” items are suddenly less tempting.
When you are in control of your finances it really is fun to go shopping and to spend money on the things you have planned for and saved for. And buying things within the budget is completely guilt-free as you don’t even need to think about whether you can afford it or not. You have already done that thinking and you know the answer.
Being in control of your money will reduce any stress you have that is related to money. The stress is usually because of lack of knowledge of your situation and feeling out of control. It can be sorted out with just a little effort (well initially it may be a lot of effort!)
REMEMBER: plan, budget, spend
We’ve all been to the doctor for a check-up of sorts. Sometimes it’s as a preventative measure and sometimes it’s to find out what is wrong with us. There are so many check-ups we can go for as there are specialists for every area of health.
Have you ever had a financial check-up though? Just going through a basic procedure to see how well you are doing? As with a medical check-up this could either be as a preventative measure or perhaps you know there is something wrong and you need to find the cause.
Here is a quick 5 point financial check-up. If you answer “no” to anything then mark that as an area of concern.
1: Do you live within your means?
If you spend more money than you make then you are unfortunately headed for disaster. You may think that things will be okay, but in reality you cannot survive by spending more than you earn. Something needs to change and the only two factors that can change are that you either need to earn more money; or you need to spend less.
If you’re employed you probably don’t have much say on your earnings. You rely on what your boss decides to pay you and you work hard hoping for an increase. You can consider looking at other jobs, or perhaps freelancing or perhaps finding some clever way to earn a little more money. Catalog sales, house-sitting, renting out a spare room, giving someone a lift to work in exchange for petrol money, making lunches for people at work, etc… It may be worth your while or perhaps not. No need to decide anything now, just think about the situation.
When looking at your expenses though, you will probably find that there definitely are areas where you can cut down. The first step is to know exactly how much you actually spend each month so if you don’t know then start with the 30 day challenge of tracking expenses. The easiest way to curb expenses is to make a budget and then to keep track each day that you only spend what you allow yourself to.
You need to be strict with yourself and the first few weeks will be hard as you develop new habits. Discuss the budget with your family so that everyone understands what the situation is.
2: Are you debt free?
Debt is so easily available and it is often marketed as a good thing. Advertisers keep telling us what a great life we deserve to have and thereby entice us to take out debt.
Debt really enslaves you as you will always be working to earn more to pay off the debt. And when you can’t afford the repayments then you can simply take more debt and worsen the situation.
The ideal goal for everyone is to be debt free. It is completely possible and you can do it no matter what your current situation is. But, it may take you a few years of patience and constant work towards the goal. There is no quick fix, but with dedication you can do it.
The first step is to know what the current situation is. So list all your debt and find all your statements and accounts and calculate how much debt you have. A good habit to form is to take your store cards and switch to cash. So going forward make purchases with cash whilst you pay off the debt on the cards. And once the cards are paid off, close the accounts. I know it may seem too simplistic, but have a look at your own situation and try work out how you can do it.
Debt – no matter what it is for – is a bad thing. If you wish to ever be financially free then you need to manage your debt and set goals as to how to pay it off.
3: Do yo have an Emergency Fund?
An Emergency Fund is not only important for your financial well-being, it will also reduce your stress levels knowing that you have some money for those unexpected things that come up.
You can decide how much you need to save, and in doing so think about unexpected expenses that you have dealt with over the past year or two. A car service, medical issues, household emergencies, family issues, etc. Sometimes you just need extra money and knowing you have it will offer great relief.
4: Are you saving for the future?
This is something that we all know we should be doing, but statistics show that the majority of people are not saving enough for retirement. The amount of money you can save is unfortunately linked to the above 3 questions as there is only a finite amount of income you earn, and somehow all these things need to be managed.
When reviewing your savings have a look at any retirement-type savings you have and tally up the savings. This is also something that should be discussed with your family as it will affect the family once you retire.
Also look at your debt again, generally speaking, the interest you pay on debt is higher than what you earn off investments. Often it is better to pay off your debt than to invest.
5: Do you feel in control of your financial situation?
It is great if you answered “yes” to this question, but if that is not the case then you need to work on this and sort things out. Being in control of your finances does not need to be complicated or time consuming and you do not need to be any sort of expert.
All you need to do is to be conscious of the above 4 questions. Managing your money is a day-to-day task which never ends. If you don’t feel like you know what you are doing then you just need to start somewhere and make a little progress each day, week or month.
Don’t wait until you feel you know what to do; just start taking control of your money now!
Here is a very quick “off the top of your head” checklist to look at.
Perhaps you feel that you know what you’re doing with your money, so why would these things matter? Let’s think about these questions a bit more.
How much have you spent on your credit card this month?
If you don’t know how much you have spent on your card (or multiple cards) this month then there is a serious problem! How do you know that you are within your budget? How do you know whether you can actually afford whatever it is you wish to buy?
It is really important to know how much you have spent on your card at any point in time as this will enable you to make informed decisions regarding your spending.
Most banks offer online banking or apps that will let you quickly see your balance. Why not get into the habit of starting the day by checking the balance so that you know exactly where you’re at. You can also take the 30 day challenge to track your expenses each day so that you can work out what your spending habits are.
What is your current bank balance?
It is very easy to keep track of your bank account. If you don’t already have a list of the debit orders that are automatically paid from your account, make one now. The date, the amount and what it is for. You should know when money is paid into your account (unless it’s a surprise gift) and thus you should have an idea all the time of what your balance should be.
When you actually check your statement, if things are not what you thought then double check the income you received as well as all the debit orders and other expenses. It is not uncommon for companies to increase fees without proper communication and you may find that your insurance or other contract has increased. If that’s the case then investigate it.
As with your credit card, you need to know what is in your bank account in order to make informed decisions about spending and saving. Seems pretty obvious does it not?
Do you have a personal budget?
If you don’t have a budget then have a look at this post on how to set one up. Let’s be clear though that if you don’t have a budget then you are definitely not in control of your money. You will find that circumstances and other people are really in control of when and how much you spend. Think about that for a while.
Set a reminder on your phone for 7 days from now and revisit these questions.