Your personal circumstances will always have a big impact on how you manage your finances. Where you live, how you spend your money and your investment goals are highly dependent on things like whether you are married or if you have children.
Your personal circumstances will always have a big impact on how you manage your finances. Where you live, how you spend your money and your investment goals are highly dependent on things like whether you are married or if you have children.
A lot of people underestimate how big a financial responsibility it is to own a house or have children, says co-head of institutional administration at Sygnia Asset Management, Marlene Budge.
But for those embarking on either of these financial journeys, Budge says the first step to take is to “know your financial position”.
“Know what you can afford, set your goals and be clear about what you are saving for,” she says. “If you’re clear about what you’re saving for and have established timelines, then you can set your objectives upfront and stick to them.”
People often aren’t clear about what their savings objectives are, Budge says.
“When you’re saving for kids you need to be informed about the financial responsibilities of having children, including schooling, extra murals and tertiary education,” she comments.
“If you’re planning to buy a house, you need to determine what your price range is and then work towards saving for a deposit on the house, which is generally 20% of the purchase price,” she adds.
Budge highlights “putting all your savings in one basket” as another common mistake. “Make sure that once you have set your objectives you are sufficiently diversified, spreading the risk across different funds,” she explains.
“When you’re saving for kids you’ve got to split your savings into short-, medium- and long-term. If you’re saving for tertiary education, that’s a long-term goal, but if you’re saving for their basic, day-to-day needs, that is more of a short-term goal.”
Budge says that short-term savings should be easily accessible and well protected. “You wouldn’t necessarily go and invest your short-term savings in the equities market, whereas for longer-term savings, such as tertiary education, you can take on more risk to achieve inflation-beating returns in the long-term,” she explains.
With a three- to five-year investment horizon, Budge suggests investing in a balanced unit trust fund, which will diversify your risk, earn you a good return and ensure your savings aren’t stuck in a bank account where they aren’t growing.
Tax-free savings accounts present good long-term savings vehicles, adds Budge. “It would take around 16 years to reach the R500 000 limit on an investment into a tax-free savings account. With compounded returns over that time, you should have quite a tidy sum at the end of those 16 years,” she says.
What you invest in also depends on your age, says Budge. “If you’re doing all of this in your early twenties you probably could be a little bit more aggressive in your investments and take on more risk. When you’re older there should be more focus on preserving capital.”
Alongside failing to set savings goals and not diversifying your risk, Budge highlights not increasing your savings in line with an increase in your earnings as another common mistake. Referring to this as “lifestyle creep”, she warns against the temptation to spend more – rather than save more – as you earn more.
“Do not be tempted to spend more than you have and don’t get into too much debt when you’re younger. Try as far as possible to stay the course. For instance, avoid dipping into your retirement savings for your mortgage or to provide for kids,” she counsels.
Before embarking on such long-term financial commitments, Budge advises reducing debt first if you are over-indebted. “If you are overly indebted, my advice would be to begin by paying off your highest interest-rate debt first and then embark on achieving your savings goals,” she says.