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Financial fitness test for the new year

Aim to get out of any debt and build an emergency fund, advises Yolande Botha from Galileo Capital.

WARREN THOMPSON:  Joining me for the next segment now is a financial planner from Galileo Capital, Yolande Botha, who will be talking to us about performing a financial fitness test, seeing as it’s the new year.

Good to have you with us, Yolande.

YOLANDE BOTHA:  Thank you, Warren.

WARREN THOMPSON:  The new year is always a good time to review what has happened in the past year. It’s a time that I think many of us use to reflect on our personal financial situation in particular: reviewing our investments, looking at our balance sheet and our credit cards that we might have used during December, and considering some decisions that we need to make around our personal finances.

I was very interested in getting some ideas from you about how people should conduct their financial fitness test in the new year. What do you think are the most important aspects people should be thinking about at this time of the year?

YOLANDE BOTHA:  I think we all are sitting with a bit of spending hangover after the Christmas spending, and I think the first thing to look at is to prevent injury. The beginning of the year is a time for setting goals, for re-looking at everything that your life consists of, your lifestyle, etc. Usually we all start with our health, eating right, getting your fitness correct. But we very rarely think about our finances.

And to be financially fit or healthy you actually have to think about it in the same way that you would approach your lifestyle around your physical health. So you need to have a long-term plan and then short-term goals going together with that. It means that you have to have time on your hands. With fitness we expect it to take six months, maybe, to a year before you are at the level where you are fit. But with finances we all have this thing that you have to get fit [quickly], the quick get-rich scheme that everybody wants, thinking that your next salary will sort of get you out of all your debt.  But it’s a long-term thing. So step by step.

WARREN THOMPSON:  The two factors that I have been thinking about are obviously reviewing my debt situation and reviewing investments. I think 2017 might have been a tough year for many investors. I think funds had a hard time navigating the JSE. Even though it went up, it was driven primarily by a few companies. So what is the sort of context people should have when they review their investments, for instance?

YOLANDE BOTHA:  I think the first thing is really to look at your own budget. Don’t run away from what your current situation is. If you are in a lot of debt, that is the first think you pay attention to. Usually the store debts, the credit cards, personal debt – those kind of things that are very expensive you have to look at. So go and look and see what your most expensive debt is, and start paying a little bit more into that particular account every month. As soon as that’s paid off, you can use that money to pay off the next set of debt.

But a lot of people will tell you that they really don’t have additional capital to pay off any debt. In that case I would say just pay it off normally. But then, once one set of debt or one account is settled, use that amount and go to your most expensive debt. Cut up that card. Don’t go into the temptation of leaving it in your wallet – it doesn’t work.

The next thing is to prevent injuries. In physical fitness you’d have a coach; in financial fitness or financial health you might need an advisor or, if you are well read, just follow the points.

But an emergency fund is always the next best big thing that you should look at. Don’t get into the position where there is a sudden big expense and you don’t have the capital available. That’s where you get into a debt situation.

WARREN THOMPSON:  How big should that fund be, Yolande, because I look at it and I say, well, I own a property and I have children, and sometimes the children get sick and I might run out of my medical savings account. Then I need to obviously pay for that. Or you have a geyser burst and it’s not covered. Or something happens on the maintenance at your house or your car, which you need to sort out. How big should that be relative to a person’s salary?

YOLANDE BOTHA:  Usually we would look at your expenses and say that you need three to six months worth of expenses in such an account. While you are still working, you usually have some sort of cash flow going on and you can, if you are very careful and you don’t have other debt, except maybe a bond, look at three months’ worth of expenses in this emergency fund. But if you don’t earn a regular income or you are not working any more, you are retired, then definitely six months, even longer. But usually three to six months worth of expenses in such a fund.

WARREN THOMPSON:  Just give us an idea of what a financially healthy individual looks like. Just paint that for us. What should we be aiming for?

YOLANDE BOTHA:  I think it’s a person that is totally independent, who doesn’t have any debt, apart from a bond. A bond you usually can’t get away from, but it’s low interest. And if you are managing it well enough with your income, that’s not bad to have, because the asset also appreciates. So it’s good debt to have. But no other debt. No other store debt, no other credit cards.

And then such a person would have an emergency fund. They will have a retirement annuity, maybe a tax-free account and some discretionary investments.

WARREN THOMPSON:  That’s very interesting. The biggest problem that you find [is] with people tackling debt. Yolande, just to round us out … do people spend too easily, and are they not aware of how much wealth destruction servicing a credit card or a high interest-bearing loan costs them over the long term? Are people sufficiently financially literate?

YOLANDE BOTHA:  That’s the thing. Debt is too easy to come by. You get all these SMSes from companies enticing you to take on debt, and you press a button and you’ve got it.

WARREN THOMPSON:  Yolande, thanks very much for your time this evening.

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