As we look forward to Wednesday’s Medium Term Budget Policy Statement, Tito Mboweni’s first as Finance Minister, and hope that it is a big improvement on last year’s, it is worth noting that the premise of a policy statement is useful.
Even if most Budget statements and Medium Term Budget Policy statements of the past few years have been more of a lesson in what not to do, we cannot deny that setting a course and outlining it is not a bad thing. Clarity of planning is also something we can and should incorporate in our private affairs. On an individual level, this would be to set out what we want to achieve and, more importantly, how we plan to achieve our goals.
Invariably, we all have good intentions to save more. But that requires a trade-off, forgoing a slightly higher lifestyle now, for a (much) higher lifestyle in retirement. For example, saving 15% of your income for retirement instead of 10% reduces your take home by a mere three or four percent after tax, while boosting your retirement income by 50%. In theory, this should be a no-brainer, but in practice it’s a hard sell.
Much like government, we may have a firm intention to save more once we earn more, but without strict financial policies to back that up, it probably won’t happen. Instead, we succumb to the financial version of Parkinson’s Law, letting our spending grow to consume all the available income.
We could make it a policy to apply Warren Buffett’s Rule instead: spend what is left after saving, rather than save what is left after spending. Save 15% of your income and force yourself to come out with what is left. It’s not impossible; people who earn less than you must also make do. Having such a policy means that your lifestyle choices are forcefully subordinated to your savings intentions.
Other policies you could implement are to never spend more than you earn, refuse to take on short-term debt, and save up for a big-ticket purchase rather than buying on credit. Once you have made the rules make it hard to deviate from them. Cut up your store cards. Reduce your overdraft. Bring down your credit card limit.
Eventually, your financial policies will become habits, and habits, as we know, are notoriously hard to break, even the good ones.
There will probably be some pain to start with, but not all savings will require that you give something up. On close inspection of your own financial affairs, you will probably find ways to save money without diminishing your lifestyle. The financial sector thrives on its customers’ inertia and disengagement; a simple spring-cleaning of your finances can give you easy wins that will improve your long-term plans without lowering your standard of living.
The biggest expense for many is the interest they pay on their bond. If you have been in your property for some years, why not request fresh quotes from other lenders, or revisit the matter with your bank? Your risk profile may have improved since you applied for your home loan, which could translate into a rate cut of between 0,5% and 1% pa. That’s an annual saving of between R5,000 and R10,000 on a R1m bond, which you could apply towards your outstanding capital or your retirement fund.
What’s that worth to you? At a real (after-inflation) return of 5% pa, it would add almost R700,000 to your retirement pot after 30 years (in today’s money).
Another expense that does nothing for your lifestyle is paying interest on short-term debt. These facilities temporarily allow you to live beyond your means, but once you are maxed out, the opposite happens – your disposable income shrinks because of your monthly interest bill. It’s a one-time indulgence that you keep paying for – at very high rates – until you settle the debt.
There are also huge savings to be had within your retirement affairs. By doing some research and choosing a low-cost fund you could save yourself up to 2% pa in fees. Over a lifetime of investing, this alone could boost your retirement savings by up to 60%.
You could also shop around for cheaper insurance, move to a less expensive medical aid or settle for a less fancy car (saving on both instalments and insurance).
Whatever you hope to achieve financially, you are more likely to succeed if you back up your ambitions with spending policies to live by. Because when you have dug yourself into a financial hole, it’s not enough to just stop digging; you also need something to hang on to, to help get you out.
