THE MONEY TRAPS

Protect your hard-earned cash in these tough economic times by not making these five costly mistakes

WE’RE all feeling the squeeze. Money is tight, which makes thinking about your finances quite stressful. But any financial expert will tell you that sticking your head in the sand won’t help.

In fact, refusing to take a good, hard look at their finances is at the root of the worst money mistakes people make. When it comes to money you need to plan, economist Dawie Roodt says.

In today’s challenging economic times, when disposable income isn’t keeping pace with the cost of living it’s even more critical that people analyse what they spend their money on, economist Graeme Kerner says. People feel the need to reduce their expenses but then make the mistake of cutting back on retirement savings or on money set aside for emergencies, he says.

We asked a few financial gurus to list the most common money mistakes people make. Here are the top five – as well as tips from the experts on how to fix them.

1. NOTHAVING A PROPER BUDGET Having a budget is key to achieving your financial goals because how you choose to spend your money can take you either closer to or further away from your goals. Tips for fixing it

Draw up a budget listing all your expenses for the past month so you can see where your money goes.

Once you’ve analysed your spending, make a list of essential monthly expenses such as rent/bond, food, utilities, car, school fees and so on.

Financial specialist and author Jillian Howard recommends using the onethird rule. This entails dividing the money left over after essential expenses into thirds, allocating one third for savings, one third for debt and one for blowing on whatever you like. The problem, she says, is that most people blow too much money and save too little.

Write down your budget, Howard says – you’re more likely to stick to it if you have it in black and white than if you’re just keeping it in your head.

Your savings should include money set aside as an emergency fund, says Ester Ochse, product specialist at FNB Financial Advisory.

Aim for an amount equal to three months’ income, she advises, and try to save five percent of your salary towards it until you have this amount. You can be sure that at some point in your life you’ll need it.

Make saving easier by putting debit orders in place so it happens automatically, Howard suggests. That way you won’t be tempted to spend the money on something else.

2. NOTSAVING FOR RETIREMENT When you’re young it’s easy to think you can always start later but remember, the time will come when you no longer earn money – but you’ll still need to be able to support yourself.

Tips for fixing it

Start saving for retirement as soon as you start earning an income. There’s no doubt about it – the earlier you start the better it is for you in the long run.

Speak to a financial adviser at a reputable organisation, Ochse says. They can help you review your retirement goals so you can work out exactly what you’ll need on retirement and how much you need to put away to get there.

A good rule of thumb is that at least 15 percent of your earnings should go into savings and investments for retirement, Ochse says.

This might seem high but considering that you start working at around 23, retire at 65 and are likely to live to between 70 and 90, you have roughly 40 years to save for the 20 years or so when you won’t earn an income.

An important part of planning for retirement is to insure your life if you’re the breadwinner, Ochse adds, particularly if you have minor children. If something happens to you, you don’t want your dependants to end up under financial strain.

3. GETTING CAUGHT IN THE INSTANT GRATIFICATION TRAP We do need to treat ourselves every now and then but this short-term way of thinking doesn’t do your financial health any favours. Tips for fixing it

When you’re tempted to buy a new handbag or pair of shoes, or want to splurge on a fancy dinner, Ochse advises that you first stop to think. Would it really be the best use of your money?

Consider for example, she says, that if you pay an extra R500 into a R1 million bond every month you could pay it off three years sooner.

Have a clear idea in your mind of what you want to achieve with your money and how you want to live, Howard says. How you choose to spend your money boils down to what’s most important to you and how you want to live.

“Establish what you want from life and figure out how much it will cost to get there,” she adds. “Write those points down to help keep you focused.” 4. BUYING ON CREDIT There are times when it’s simply unavoidable – few people can afford to pay cash for a home or car, for example.

But be careful about running up debt on credit cards and store cards as it can quickly get out of hand.

“People often get a credit card just because it’s the thing to do and not because they really need one,” Howard says. Tips for fixing it Use cash wherever possible, Howard says, as this helps you live within your means. “If you can’t afford it rather save for it.” If you’re careful with money you can use a credit card – just be sure to pay it back in full every month. Student loans can be considered a “good” form of credit, Howard says, as the aim is to help you improve your earning power. But be sure to do your homework and shop around for the best rates.

5. NOT REVIEWING YOUR LIFESTYLE REGULARLY Marriage, kids, divorce, retrenchment – so many factors influence your circumstances and your financial planning needs to reflect this.

Perhaps you bought a house or car based on your salary at a certain time and it’s now proving too expensive for your budget.

It happens, and you should simply make changes accordingly, Howard adds.

Tips for fixing it

“Have a financial review day every year when you look at your current financial position, consider the year ahead and plan accordingly,” Ochse says.

You need to review your lifestyle, income, debts and investments often – especially when you get children, Howard adds. If not much has changed in a year, you could do a review every two years instead. “But no longer than that. Every year is ideal.”

When you do your lifestyle review, recommit yourself to living as inexpensively as possible and saving as much as possible.

“To get rich you need to live below your means,” Howard says. “That’s really the fast track to becoming wealthy. From there you can progress to a better house and a better car – because you can afford it easily.”

Review your insurance policies – it can save you quite a lot of money.

“Someone who’s 40 with three children in school and an average of 10 years of schooling still ahead may need R5 million worth of life cover,” Kerner says.

“Fast forward to the age of 55 and you don’t need it any more – but often people carry on paying for it. S

‘Toget richyou tolivebelow need means.That’s thefasttrack tobecoming wealthy’