If at first you don’t succeed… try a different tact
ALBERT Einstein said “the definition of insanity is doing something over and over again and expecting a different result. I regret the error”.
We see this with Springbok rugby when the selectors and coach keep using the team that came third in the South African leg of the Super league as the core. Doing the same thing over and over, selecting the same players who keep making the same errors (like not being able to convert or kick penalties) and then still expecting to win. This is insane. But don’t laugh because we make the same errors in our daily lives when it come to our finances.
Today, in how to make sense, we will investigate the probability of doing things differently and obtaining different results.
Einstein ends the famous saying by concluding: “However, this is where the fun begins.” Let’s start the fun. Our fun begins with one more loan, a loan to consolidate all other loans and always promising ourselves that this is the last one. We forget that we may have promised that to ourselves twice before.
In deliberations with a consulting client, an organisation that is attempting to lead people out of this miserable indebted situation, we looked at the payslip of a client. He cleared just over R1 000 on a R7 000 salary. The payments were made up of those for policies and loans. From the R1 000, he had to pay for housing and food. How can he manage to do that?
The allegation was that he was overinsured. I contended that in more than 30 years of doing client portfolio analysis and reconstructions that I had not seen more than 2 percent that may have been overinsured. Most had poorly constructed portfolios and were paying too much – very different from overinsurance that showed people may be insured for too much.
The client has no option but to continuously go into more loans to make ends meet. His employer is also guilty of allowing too many deductions for insurances from his salary – we counted five for just one life insurance company. What can we do? We determined how much cover was required to pay for debts and to provide an income for his family and himself if interrupted by poor health or an accident. He was paying four times more than what he needed to cover his needs.
We won’t suggest to the client that he cancel any of his policies until the reconstructed cover is secured.
We can improve his take-home pay to more than R3 000 a month, before loan redemption. After loan redemptions, he will take home just short of R5 000.
I followed a series on creating breathing room in your life, presented by Andy Stanley (createBreathingRoom.com). He shows how we create it in three areas of life: relationships, schedule (diary) and finance (budget). The most fascinating one of the three that influences the other two is finances – our subject matter in these articles.
We live our lives to the limit and will find that our expenses match our income. We don’t have any breathing room between where we are and what income allows – the limit. This, he says, can be ascribed to the fact that we don’t put a limit on the amount of outgoing that will be allowed on our income.
If we don’t do this, the marketing world will sell us on the importance of raising our standards of living by spending more.
This standard of living when high is the same as quality of life. Yet, there is no room for quality when we are at the limit. In our example above, we can pose the question: how will our subject create a quality evening out or a vacation on the take-home pay he receives?
To create the breathing room, you have to: overcome the fear of not having and falling behind; decide what percentage of income you will spend (allowing the rest as breathing room); and spend less. Cut your standards of living in favour of quality living.
Watch the videos online and contact me if I can assist in making adjustments. Please, don’t go out and cancel your insurance, this will leave you and your family in a far worse position if things go wrong. Also, do not consider car insurance only and look at income replacement cover during health and accident interruptions, dread diseases (cancer, diabetes and so on), accidental death; permanent disability; and death (not funeral cover only).
Deon Hattingh is a certified financial planner. E-mail him at deon@howtomakesense.co.za.
(Note: My computer crashed so I have not replied to all queries. Please forward your unanswered queries to me again.)