Budget Review: You could be saving here!

June is Youth Month and one of the biggest issues facing the youth of South Africa is debt, whether it be student debt, loans or credit card debt. While debt is not the enemy, the real challenge is to manage it. This month we look at young professionals’ budgets in the hopes of saving them money. With the help of Ester Ochse, First National Bank’s financial advisory product specialist, we will run a series of budget reworks over the course of the next few weeks.

This week we review the budget of a 26-year-old woman who works as a primary school teacher.

She is a 26-year-old female who works as a teacher. The assumption is that she has some risk benefits and medical cover through her employer. So, these have not been taken into consideration.

“This lady is in a very good position and she can truly start on the path of wealth creation with a few minor tweaks to her budget. She has time in her favour, so she will not fall into the trap of starting too late with retirement planning. The earlier the better,” added Ochse.

But let’s turn to her budget:

Housing:

– The rent number is not too high, neither is the cell phone or electricity.

– However, the rates and water seem on the high side. This could be because a levy is charged for the property.

Transportation:

– Her car repayment is in line. However, we hope that this is a straight car loan and not one with a residual payment which could see her paying more.

– You do not want to buy a car which is too flashy at the risk of short-term and medium-term goal investing.

-However, we do note that she does not have insurance on the car and that is vitally important.

We have budgeted R500 per month for this. Car insurance is a non -negotiable.

Insurance:

-Although it is assumed that she has medical and long-term risk benefits through her employer, she must also insure her ability to work. She might want to consider a holistic financial needs analysis to be done and put disability cover in place, in the event that she is disabled.

-She mentioned other insurance – it is important that she has a proper view of what this is and that it is the correct solution for her. Again, a financial needs analysis is the best route.

Food:

– If she is sharing the home with someone, then the groceries are in line. However, if she is staying alone this might be on the high side. However, we have left it as is.

-The dining-out expenses are too high, and we have dropped this to R1000 per month. The extra we have re-directed to her savings.

Personal Care:

-“Since this is a young lady, I am not going to get involved in her hair and nails! However, this is only because she has a surplus money at the end of the month. If she did not have money there would have been a different conversation,” said Ochse.

Loans:

– She has a credit card with a monthly instalment of R300. We suggest doubling this to R600. And in future she should try to use her credit card wisely and not give in to purchases that she needs to pay off.

Savings and Investments

-This is where the major changes come in.

– Firstly, she needs to build an emergency fund. You should ideally aim for about 3 months’ salary. While this does seem excessive, starting is important. We have allocated R1000 per month to this. After a year this will be R12000, which is a decent sized emergency fund to then build on. Once she has the 3 months’ salary in place, she can re -direct the R1000 per month to her other investments.

-Then she should start an investment, something like a tax-free savings account with the view that this is long-term money investment and could supplement her retirement. We have allocated an amount of R750 per month to that.

This budget rework will leave her with about R700/month for unforeseen expenses and a bit of extra spending money.

The key takeaway here is to not necessarily cut expenses, but to reallocate money towards financial structures like saving tools and an emergency fund that will see her in a better financial position overall.