When it comes to financial planning, every decision you make has a consequence – meaning the money mistakes you make today can set you back financially and slow down the process of wealth creation. While some mistakes may be obvious, others may be seemingly innocuous although detrimental to your financial future.
Taking a balloon payment on your car: In order to make a vehicle more affordable on a monthly basis, many dealerships structure financing agreements that include a balloon payment, or residual value, at the end of the contract term. A balloon payment is where a percentage of the vehicle’s value is taken off the financed amount, with this balloon or residual amount becoming payable as a lump sum at the end of the financing period. While this has the effect of lowering your monthly repayments – thereby making the vehicle appear more ‘affordable’ – you still pay interest on the residual amount and will need to ensure that you have a capital amount available at the end of the contract or risk having to sell your car.
Not using your credit card properly: At the end of each month, you have the option of paying the outstanding balance in full or paying a minimum monthly repayment, and the difference between these two payment methods can have a significant impact on your finances. Paying off the full amount outstanding on your credit card each month is the first prize as this will ensure that you do not pay interest on your purchases, although it is important to understand how your interest-free grace period works in order to take advantage of it. Most banks offer between 30 and 60 days interest-free credit, so be sure to read the fine print so that you get the timing of your purchases and repayments right.
Buying and selling property too often: The bond registration and transfer costs associated with buying property are significant. On a home loan of R3 million, a purchaser can expect to pay around R240 000 in transfer costs, including bond registration, transfer duty and bank initiation fees. As a result, buying and selling property too often can set you back financially. Before buying property, give consideration to your medium-term needs and not just your short-term accommodation requirements. Selling a property also attracts costs like commissions, electrical certificates, moving expenses, etc.
Cashing in your retirement fund benefits: When leaving employment, many are tempted to cash in their pension or provident fund benefits. However, any withdrawals made from your long-term investments interrupts the process of compounding and effectively re-sets your wealth creation. If possible, either preserve your retirement fund benefits in a preservation fund, transfer them into a retirement annuity, or move them to your new employer’s retirement fund.
Not having a credit card: A credit card can be dangerous if you lack discipline and don’t manage your card responsibility, but it does serve an important role in boosting your credit score. Responsible management of your credit card counts a significant amount towards your credit record, so it’s worth applying for one. In order for it to count towards your credit score you will need to use it, so consider making a few purchases and then paying them off immediately.
Resigning without secured employment: Being stuck in a job that you hate can be soul-destroying but resist the temptation of resigning before you’ve secured a new job. Not only does it look suspicious on your CV, but not having a source of income can leave you in a financially vulnerable position, even if you have an emergency fund in place. Times are tough economically and unemployment is at an all-time high, so it makes sense to hold onto your job while you look for alternative employment.
Not negotiating your salary: If you know your workplace value, be sure to negotiate a market-related salary. Remember, many of your employment benefits – including your pension fund contribution, group life cover, income protection benefits and bonuses – are linked to your income, so settling for a lower income will have a massive financial effect on your future. Find out what a person with your qualifications, skills and experience is worth in the marketplace and then negotiate with confidence.
Living on credit: Relying on credit to sustain your lifestyle is not sustainable and will ultimately result in you becoming laden with debt you are unable to service. If you are using credit to cover standard items such as groceries, rent and/or services, you need to slash your budget to ensure that your income is sufficient to cover your day-to-day living costs, and then put a stringent debt reduction plan in place to ensure that you can eliminate your debt as soon as possible.
Lending money to family/friends: Soft loans to family members or friends very often end in heartache. When making loans to friends and family, many people tend to forgo a loan agreement on the basis that the relationship is one of trust. Where the person borrowing the money defaults, family relationships become strained and acrimonious as tensions rise. If you intend to lend money to someone a friend or family member, make sure you put a formal loan agreement in place which clearly sets out the repayment terms.
Leaving free money on the table: The tax benefits afforded to retirement annuity investors are significant, especially when compounded over the long term. Not only are contributions tax-free (up to a maximum of R350 000 per year), but no tax is paid on interest or dividends generated by the investment. The advantage of investing with before-tax money, coupled with enjoying tax-free investment returns, is significant and should not be ignored. To take full advantage of the benefits, investors should begin investing as early as possible.
Falling for investment scams: Generally speaking, people are more susceptible to falling for investment scams in tough economic times. Fear and financial desperation can drive normally cautious people to take uncalculated risks with their money, often with devastating consequences. The golden rule of investing is that there is no quick way to make money. Long-term investing is a ‘get rich slowly’ scheme with no shortcuts.
Investing too conservatively: Investing too conservatively over the long term can adversely impact the purchasing power of your money. Investments that merely keep pace with inflation will not serve to build your wealth. It is important that your invested capital is exposed to growth assets to ensure that your returns beat inflation over the long term and that the value of your money increases in real terms. Investing too conservatively may result in your money losing value – and therefore purchasing power – over time.
Not taking out short-term insurance: Many people have found themselves in financial difficulty because they have failed to take out sufficient short-term insurance. Rather than viewing short-term insurance as a grudge purchase, consider it as a necessary part of your wealth creation plan. Until you are in a position to self-fund, have adequate insurance on your home, household contents, vehicle and other valuables.
Cancelling your medical aid membership: Medical aid is not cheap, but it is absolutely necessary – especially as our public health facilities are wholly inadequate. While you may be tempted to cancel your medical aid in order to cut costs, there are consequences for doing so. Remember, if you remain off a registered medical scheme for 90 days or longer, you may be subject to late joiner penalties which are applicable for life. Where a member is age 35 years or older and has not been a member of a medical aid before 1 April 2001, or where there has been a break of longer than three consecutive months, the scheme can charge a late joiner penalty of between 5% and 75% depending on your age and break in membership.
Not protecting your income: Your income – or more specifically the part of your income that you don’t spend – is what you have available to build your wealth between now and when you retire. As such, it is important to consider how you would cover your living costs should illness or accident render you unable to generate an income. An income protection benefit is specifically designed to replace your income if you are either temporarily or permanently disabled. Consider that not insuring your income can leave you financially dependent on your family or friends for the remainder of your life.
Not building an emergency fund: An emergency fund is a financial planning fundamental because it prevents you from going into debt in the event that high, unforeseeable costs arise. In the absence of easily accessible money, you may be required to incur expensive debt to pay for the emergency which, in turn, will leave you debt-laden and cash-strapped – and in a financially weaker position the next time an emergency arises.
Not filing your tax returns on time: Having your affairs in order with Sars is hugely important, and failure to submit your tax returns on time can result in admin penalties that accrue on a monthly basis. The administrative non-compliance penalty for failure to submit a tax return comprises a fixed amount based on your taxable income, and these penalties recur each month that you remain non-compliant.