Don’t spend based on other people’s income

The practice of storytelling is ubiquitous among cultures all across the globe. Sometimes we seem to forget the power that a story can hold over people. We use stories to make sense of our world and to share that understanding with others. When it comes to something as important as finance it is important that the stories we tell ourselves are based in reality.

Yes, the stories that we tell ourselves. We can be forgiven for inflating the truth amongst friends, since most of the time everyone is aware that the story is unbound by facts in the name of entertainment value. But when creating the stories that we tell ourselves, the stories that we make financial and life decisions based on, our brains can play tricks on us.

A notable example of this brain trickery is known as the Relative Income Hypothesis. This hypothesis, developed by an American economist named James Duesenberry, states that an individual’s attitude to consumption and saving is dictated more by their income in relation to others than by an abstract standard of living.

In more basic terms, we base our spending habits on how we think our income compares with those around us – our neighbours, family and friends. A classic case of keeping up with the Joneses, except we have absolutely no clue what the Joneses financial situation looks like compared to our own. So, we create stories.

If our neighbour pulls up in a flashy new car we might be saying to ourselves, “How can they afford THAT?!”, “Their payments must be through the roof!”, “Are they more successful than me?”… only to find out a few days later that the car was on loan from a dealership while their regular vehicle was getting fixed. It is possible we might have even started looking at financing a new flashy vehicle of our own just to see if it would be viable.

That is the power that stories can have on us. We can go from financial contentment to debt in the space of a misunderstanding. It is important to remember that the only financial situation that matters is our own.

But, let’s say the flashy car was your neighbour’s latest toy to keep, would rivalling their new purchase really make us happy? We shouldn’t be feeling like we are stuck in a rat race. If we can nurture an abundance mindset we will see that life is full of opportunities.

If you’re running low on opportunities or feel like you’re financially stuck then let’s get in touch!

Cold hard cash

Debt statistics are growing – this is very likely in part to the fact that a vast majority of us today prefer credit cards over cash. The benefits of credit cards are obvious. They are more convenient and offer more security.

Cold, hard cash, however, can be the best way to organize your spending.

Here are three reasons why you should opt for using cash instead of credit cards for managing your daily budget.

1. Less likely to overspend

Healthier spending habits develop when you use cash. You become more mindful of how much each item costs that you’re putting into your basket, and you won’t want to spend all that you have. More self-control is gained, as you make less impulsive purchases of unnecessary things than you would have if you were using a credit, debit or store card.

Also, cash payments carry no interest rates that you will have to pay back later. You pay the amount on the price ticket, nothing more.

2. Become more engaged with your budget

You will become increasingly engaged with your budget when you work with cash. As compared to the possibility of inconsistent credit card interest rates, with cash you can easily track your expenditure, ATM withdrawal fees and how that favours against your income.

Budgeting and planning your expenditure can be a more enjoyable exercise when you use cash. You can easily reduce your debt too because no interest will be accumulating with every payment you make and you won’t be bleeding money on overspending.

3. Become more creative with your spending

Carrying cash can alter your financial mindset for the better. Since you’ll be limited to what you have in possession and not have the same spending power you get from credit cards, you’ll find that you will become more inventive with your spending.

The longer you challenge yourself to use cash, disciplined spending will become ingrained into your lifestyle as you’ll look for bargains, better deals and more ways to make your money go further.

Studies say that you develop an emotional attachment to items paid for with cash because you feel you made that purchase possible and it was not enabled by your creditor.

Consider the advantages of using cash before swiping your plastic. You can form a better financial identity and live without the drawbacks of credit cards when you go for cash. You can even develop a more mindful approach to your spending because your purchases will depend literally on how much you have in hand.

Three ways to thrash your debt

Effectively managing your debt is one of the best and most proactive ways of ensuring a sustainable financial future. It is deeply gratifying knowing that you’re doing something right when you see your debt shrinking!

The journey of exploring the best ways to manage your debt can improve your attitude and enthusiasm towards settling it. Instead of seeing it as a burden to your financial goals, you’ll recognise that it’s an inspiring investment towards your financial freedom.

Here are three often-cited ways to repay your debt.

  • Snowball method

The snowball method is frequently thought of as the best debt-relief option as it means you start off by paying the smallest debt and then move on to bigger loan amounts. This technique can be valuable for boosting morale and improving your sense of achievement as you start to see the results early on. Your debtor statements are reduced and you will be encouraged to continue with this debt repayment plan.

However, this means you end up paying higher interest costs, because it considers the payment of the debt and not the interest rates around it. To get around this, you can find other ways to refinance your high interest debts.

  • The Avalanche method

This strategy is the opposite of the snowball method. You start off with the biggest debt and finish with the smallest. If you’re looking to save on interest this is the best strategy to employ. 

This strategy requires patience as it doesn’t offer immediate results but, in the long term, you can be debt-free quicker. You need to have the resolve to settle bigger debts. From there you’ll be more motivated because only the small obstacles will be left. 

  • Debt consolidation

Through debt consolidation you can easily keep up with multiple payment deadlines by combining all your debts into one. This involves taking out one large loan, equal to the amount of your entire debt, and paying off what you owe in one place. 

The obvious risk is that you would now be using debt… to get out of debt. However, you will end up owing one creditor instead of many, and could potentially secure a more beneficial interest rate overall. When followed effectively this method can help reduce your debt whilst improving your credit score.

All three of these strategies can be useful for reducing your debt. Discipline is required with all of them because having the best strategy is not enough – you have to follow through with it too. 

If you need help with this – just give us a shout!

The long haul

Saving is not just about a plan – it’s a behaviour.

Part of this behaviour is rooted in our mental ability to overcome our own fears. We reduce these fears by mentally preparing for life goals and recognising that we have what it takes to achieve them.

Mentally preparing for long term savings is like preparing for a long-distance race or a trip. You start exercising today so you can cope with the physical demands of next year’s marathon. You sort out your travel necessities now so you don’t struggle with them when you have to go on your trip.

The same goes for your long-term savings. Starting to save today helps to accumulate more wealth for the future; anticipating and providing for the expenses that you expect to incur.

Here are four ways to help you prepare for a financially secure future:

1. Set a goal and start saving as soon as you can

Establishing a monthly budget helps you develop healthy spending habits, reduce your expenditure and have more to invest. Having a goal is a big part of this process because it’s really hard to save if you don’t know what you’re saving for.

The value of saving early is that you’re creating an opportunity for your money to work for you longer through the value of compounding interest.

2. Start working on your debt

Being engaged with your budget means being engaged with your debts too. Actively dealing with your debt now, frees up money to direct towards your future. Picking a debt management plan that will work best for you and your unique goals is the first step.

Diminishing your debt should be one of your goals. Seeing your debt decrease will encourage you to save and build more wealth for your future self. There are various strategies you can use to settle your debt in a way that works best for you.

3. Stick to your retirement plan

It’s like sticking to the road map, even if there is construction along the way. Having a retirement plan can help you look into your future more optimistically because you’ll be comfortable knowing steps to ensure it have already been taken. This can be really hard when markets bottom-out or there is a major crisis – but this is when it’s even more important to stick to YOUR plan.

If you’re struggling to stick to your plan, consider doing your research on the various retirement plans and consult your financial adviser for help with balancing your investments or maximizing your tax advantage in order to build a substantial investment portfolio whilst creating more liquidity for your current situation.

4. Adopt a more positive outlook on your finances

Developing a positive outlook towards money begins with you understanding that a life of abundance is created by starting to enjoy what you have instead of focusing on what you think you need. It’s about stopping to smell the roses on your long-distance run, or taking a break to drink in the scenery on your road-trip.

Learn to make saving a part of your lifestyle. Recognise that short term savings can be good but prioritizing long term savings can create a more sustainable future for you. See it as a way of ensuring you have more spending power in the future.

Partnering with a financial adviser can help you put a plan into place – but also change your behaviour and attitude when it comes to money to make sure that your complete financial plan supports the life you want to lead and the legacy you wish to leave.

Soup’s on ain’t a soupçon!

As the days draw shorter, the sun stays hidden for longer and the colder weather encourages us to hibernate away, coupled with constrained financial conditions, we can be forgiven for falling into the trap of thinking smaller, trying to save both money and energy.

When it comes to cooking for the family – here’s a great idea to stretch out a little, as if the sun is shining warmly again.

Soups! They are jam-packed with vitamins to help you fight against the flu, the ingredients are basic, it’s affordable, you can keep it for ages if frozen and… it’s a great hot meal!

Warm, hearty foods on a cold day both comfort and sustain. Slow cookers can be bought for relatively cheap and use little energy – so set the soup up before you head out, and arrive home to a delicious aroma – and a delicious supper.

Let’s be honest, convenience is expensive; cooking from scratch means that you can buy vegetables and other ingredients in bulk while they’re on special and cook up batches of soup or stew that can be kept in the freezer for another few days. (Fresh fruit and vegetables are one of the most price variable foods, so it is generally better to buy what is in season.)

The other great thing about soups is that most vegetables can be used in their entirety (leaves, skin and all), without wastage or extensive prep time.

Hosting a soup party is a great winter alternative to a braai. Both have a casual atmosphere and instead of everyone bringing their own meat, guests bring soups, breads and cheeses.

Serving with soup mugs instead of bowls is a great way to keep things informal and everyone can dish up for themselves. There are literally thousands of soup recipes online to keep everyone happy – from hearty to creamy to spicy.

Once everyone has settled down – let the games begin! With everyone gathered around, soup mugs in hand, it’s the perfect time to introduce a game. There are lots of free smartphone apps that can work for group games, the trouble is finding a good one (I would recommend Heads Up!). If you’re a bit more old-school then feel free to break out a board game or cards.

The point of this blog is to highlight that it’s still possible to have a healthy meal and some good old-fashioned fun without spending a fortune on a fancy, formal dinner. Food is an everyday necessity that can be effectively used as an area for cutting down on costs, without sacrificing on nutrition and taste.

When Rona hits your wallet

Whilst we may try our best to keep our bodies safe from the flu – we may overlook the sluggish money myalgia that can hit us around this time too! You might have financial flu…

Every winter our communities are hit by different strains of coronavirus (root of the common cold and flu). COVID-19 is the latest strain that initially impacted our health systems, and then quickly affected our financial systems and virtually every other area of society, politics and the economy.

As with our bodies where some of us are more resistant than others and show very little symptoms, our financial situation may be more or less resistant to financial flu. We might handle financial stress very well, and bounce back quickly, but some of us may not.

People around the world are currently under financial stress – which will lead back to physical and emotional stress too.

This typically shows up in the difficulty an individual or household could have in meeting financial commitments due to both a shortage and/or misuse of money.

Many of us with financial flu may find that we are stressed continually about our finances, specifically around things like: short-term debt, car and credit card payments; extended family obligations; not being able to save; not having enough for any emergencies; and school or university fees.

Being able to list these different stresses helps us talk about them and deal with them, one at a time.

In 2017, Sanlam’s Benchmark survey cited that short-term debt was the biggest source of stress. Not much has changed.

Viresh Maharaj, CEO of Sanlam Employees Benefits: Client Solutions, rightfully pointed out that this stress would be considered an epidemic if we were referring to a disease. “If this was the flu, then 70% of South Africa said they’ve got the flu at the same time, it would be headline news.”

In most countries the middle class is the backbone of the economy and pays a substantial part of the country’s tax system. A lot depends on this sector, so these levels of stress are concerning.

If you are feeling like this resonates with you, and you’re showing similar symptoms, one of the conversations you might like to have is around conspicuous consumerism, as well as demanding economic conditions. The advertising industry has created “a culture of consumption on steroids” that needs to be addressed. Maharaj also ascertains that “while the National Credit Act includes various checks and balances… it doesn’t address the fact that being able to pay for something is not the same as being able to afford something.”

The findings from the Sanlam survey suggest that many middle-class citizens may struggle to meet short-term goals, which may have a knock-on effect of limiting their capacities to ensure they have enough funds to properly provide for their retirement.

Many individuals seem to be focusing on immediate financial concerns, and socio-economic constraints mean that the retirement funding issue isn’t being resolved. In the survey, over 60% of respondents “said they would work beyond retirement age, while 73% said they would reduce their current standard of living.”

However, we don’t have to be part of this statistic. Now’s the season to get our financial flu jabs and build up our immunity to making costly financial decisions. Protect yourself from any kind of flu this winter by seeking advice and taking the appropriate measures to ensure your long-term financial wellbeing.

Mid-Year Money Check

Many of us only look at our financial plan when we receive a windfall (this is not often…) or when things go terribly wrong. It could be the loss of a job, the loss of a loved one or another crisis (like a global lockdown…).

These aren’t necessarily the best times to make investment decisions or changes to our financial plans as emotions are often running extremely high during times of transitions and our stress levels will be elevated.

That’s why taking the time to do regular (quarterly or biannual) reviews gives you a better baseline from which to assess your portfolio and keeps you in the practice of being aware of what’s going on with your money. This is often easier said than done, and if you currently find yourself needing to make some changes, and are highly emotional or stressed, make sure you include an impartial third-party to assist you with this.

Your review should consider each of your financial priorities and your strategy for reaching them. If the conditions have changed, adjustments need to be made to make these priorities attainable in your desired time frame. Again, don’t feel pressured into doing this alone – include the others in your family who contribute to making and spending your combined income, and bring in your financial adviser.

As you do this, you will quickly notice that your priorities will change, you may need to rebalance some of your investments or portfolio products. This is okay – being flexible inside of your plan is as important as checking in with it regularly.

Thinking about a will, health care proxy, and power of attorney can be uncomfortable, but the alternative is letting someone else make these decisions for you. If you don’t have these key documents, take the time to set them up. If you already have them then a review might be in order. Life events such as moving, having children or grandchildren, or losing a loved one can have a big impact on your overall plan.

Careful, regular planning is essential in all economic climates. Are you preserving your assets? Are you protecting your income? Are you saving tax efficiently? A review can help prioritize financial decisions that you need to make to support your own and your family’s goals across generations.

Hold onto your life cover

Sometimes it feels like this conversation is a broken record, constantly going round and around on the same track: people the world over are feeling the financial pinch and tightening belts.

It’s not just a local issue, and it’s not a new concern.

A few minutes on Instagram or Twitter will reveal just how many are building their third, fourth or fifth ‘side hustle’. This is partly because our internet age has made alternative streams of income more viable, but also because our current economic pressures make it almost impossible for families to cope with a single, or even dual, income.

When external pressures leave us feeling hard-pressed, it may be tempting during such times to reduce or release our risk cover policies – with life cover being a common policy to cancel. Sometimes, these decisions are made in order to maintain a certain living standard – however, this could have dire financial consequences for your loved ones.

Life cover is never an easy conversation to have. And when things are tight, you have to weigh up paying your monthly premiums against the potential effect on your family if they were to lose your income entirely in the event of a disaster.

The problem with cancelling your life cover isn’t just that it is a massive risk, but that it also may be impossible to replace it as you grow older.

Many people may assume that you can simply cancel your life assurance then reinstate it when it’s easier to afford. However, premiums are likely to be substantially higher when you’re older (cover is said to cost double at the age of 45 what it costs at age 25). Health conditions may also be excluded from the cover and, in the worst case, you may even be uninsurable if you are diagnosed with certain illnesses.

Even missing the payment of a few premiums can have a negative effect. Not only may you need to undergo the underwriting procedure again, but any deterioration in your health would be taken into account when considering policy reinstatement and premiums.

So what are the alternatives?

4 possible alternatives to cancelling life cover (this is not financial advice)

1. Reduce your monthly expenses
Cut back on items that aren’t essential, such as your television subscription. Critically evaluate your budget and examine what is imperative versus what you just would like. Remember, this is not forever, it’s about prioritizing your financial security.

2. Re-negotiate your debts
Try approaching creditors or your bank to negotiate terms of any repayments. They may be willing to accept smaller sums over a longer period.

3. Press pause on your savings
Consider taking a ‘payment holiday’ on your contributions to an investment portfolio.

4. Negotiate your premium payment pattern
Request to change to an escalating-premium pattern for your life cover, which means that your initial premiums will be lower and increase over time.

Please note that the above four points are suggested options, if you would like to review your plan inside of your changing situation – please arrange a meeting for us to objectively make the best decisions according to your individual needs. It is important to stay educated about life cover and informed about affordable solutions, so please discuss this if it is a concern.

Working with different money personalities

As the 2020 global pandemic for COVID-19 becomes forever etched in our history, most of us will remember how the term ‘lockdown’ moved from a novelty to a serious psychological threat. At the point of writing this blog, it’s not clear just how vast and integrated the knock-on effect of lockdown will be, but for most of us it’s confronted us with conversations we’ve never had to have before.

Being confined indoors, or a specific area for an extended period of time brings out the deeper facets of our personalities and stress coping skills. Several years ago an article by Maya on Money spoke to money personalities – and whilst this has perhaps been overlooked or avoided by many, lockdown will most certainly be a catalyst for addressing it now!

Money has been cited as the biggest reason for divorce, and differing attitudes towards money in any relationship can cause friction. So let’s take a look at some basic ‘money personalities’ and you can decide with which you most identify.

This may not only help you manage your relationships in both trying or triumphant times, but also how to go about managing your wealth creation as a couple, family or shared living arrangement.

1. The Spendthrift
A spendthrift tends to be extravagant and spontaneous with regards to money matters. However, sometimes they can be irresponsible and need protection from making financial mistakes and getting into debt that they can’t afford.

2. The Saver
Someone who saves may have quite modest tastes and needs, and long-term they may well reap the rewards of their cautious approach. However, their financial prudence and love for budgeting could be a turn-off for someone who is not that way inclined.

3. The Cinderella
Maya Fisher-French refers to the ‘Cinderella Complex’ in her article when she considers a woman’s unconscious (or conscious) desire to be cared for. Some people are simply looking for a partner who can spoil them, which Fisher-French refers to as a Blesser.

4. The Financially Independent
Other people make it their main focus to become financially independent so that they can manage their money and responsibilities on their own. They pride themselves on working hard to become financially organised and not needing to rely on anyone else. This type of person may fret about being pulled down by someone who is less financially astute.

5. The Power Hungry
Power plays can arise if someone uses money to wield power over others. The adage, “he who holds the gold, makes the rules,” may be true in some relationships – especially if there is a big difference in earnings. Money can create a shift in power that can be easily abused if all parties are not careful.

Rules should be agreed on by all who rely on each other. Different money personalities can be compatible if a balance is achieved; everyone needs to recognise the strengths they are bringing to the relationship.

For example, a Saver can help a Spendthrift to avoid some financial miscalculations, while a Spendthrift can teach a Saver to loosen up and enjoy splashing a bit of cash sometimes.

Likewise, someone who enjoys spending money on their family could be compatible with those who enjoy having money spent on them.

If there has been a major change (loss of income or work for any of the income earners in the home) it can be enormously stressful if we don’t have the words and tools to have better conversations about earning, saving and spending the household money.

It’s powerful to know what type of money personality you are and to find synergy in your relationships. It’s not necessarily a question of having the same attitude and approach to money issues, but rather finding compatibility and compromise.

A level head saves skewed vision

As Nelson Mandela said, once we’ve climbed a great hill we only find that there are many more hills to climb. When you’re looking up or down the hill, it’s easy to have a skewed vision of what’s really going on. We spend more time going up and down than resting at the top; it’s difficult to hold a level head in times of turmoil.

You may look at your bank statement this morning and see that there won’t be enough to cover your debit orders and upcoming expenses. This is scary! Conversely, you may see plenty of money and fear wasting it!

Money will always flow in and out; the longer we live and earn, the more we are reminded of this.

Whether your financial resources are lean or lush, you may be tempted to make some big moves to manage the coming months as wisely as you can.

When it comes to managing your investments it’s crucial to stay focused on the bigger picture – even when recent events may have you itching to move your investments out of the market and into cash. We need to keep a level head and not skew our vision.

The herd mentality, or groupthink, to ‘cash in’ arises from the fact that cash investments are readily available for use and are mostly free of investment risk. The low risk of a bank failing is essentially the only concern as they are investments on short-term, variable-rate deposits with reputable banks.

However, in an article published at the start of April 2017 in Personal Finance, Leigh Kohler, the head of research at Glacier by Sanlam (South Africa), explained that it’s important in uncertain times to remember that even though a cash investments may seem like a comparably safe option, the returns don’t often beat inflation. According to her, only once between 2001 and 2016, did cash investments outperform local equities and bonds.

Furthermore, if you had been invested only in South African equities over this period, you would have received an average return of 17.12%, compared to just 7.96% if you had only invested in local cash investments.

You are also taking two market-timing risks if you wish to move your investments into cash then back again once things have calmed down, and research shows that getting the timing wrong can be a devastating blow to your portfolio.

What should you do in lieu of making an emotional decision?

  • Slow down your decision making process and include your trusted adviser;
  • Invest in a combination of asset classes in line with your needs, time horizon, and risk tolerance;
  • Invest in a suitable multi-asset fund;
  • Ensure you have sufficient exposure to offshore assets;
  • Understand and believe in your long-term investment strategy, then stick to it.

Scary times come and go – the burden of responsibility weighs on us regardless. How we protect and use our hard earned wealth and accumulated assets need to reflect what’s truly important to us, and not be a reaction to current trends and happenings.