Clipping shopping coupons and scoring flights with credit card miles can save a few bucks here and there, but achieving long-term financial stability requires a much more holistic approach.
Let’s look at five big personal finance topics: budgeting, saving, debt, insurance, and retirement, and discuss a helpful principle for each.
You may have heard you would be a millionaire if you’d just skip your morning Starbucks coffee, but it’s likely that you can save more by cutting costs on the expensive stuff like housing and transportation.
In 2021, the average new car cost about R370 000. However, buying the same car pre-owned could save more than R100000, much more than a year’s worth of Starbucks Coffees.
It’s easy to say, I’m going to save R60 000 for retirement this year, but you also need to define your tactics for pursuing your goal.
Subgoals can help guide your savings strategy: if you want to save R60 000 this year, think about how you might save R5000 this month by increasing your income or trimming your expenses by about R1150 a week.
These mile markers can help you assess how realistic your goal is and help you monitor your progress.
You might have heard to avoid debt at all costs, but not all debt is created equal. One type of debt to avoid is debt with an interest rate higher than 5%, like credit card debt carried from month to month.
Also, try to avoid going into debt for anything that is likely to quickly lose value like jewelry, and other luxury goods. But there are times borrowing money makes sense. For example, loans for education or starting a business are often considered healthy debt because they may lead to more income down the road.
For some, a low-interest mortgage might be a good use of debt, because a house has the potential to appreciate. And even using a credit card as long as you pay the balance in full every month can help improve your credit score by showing lenders you can responsibly manage debt.
But healthy debt only helps your credit score if you make your payments on time, so if you’re looking to increase your credit score, only borrow the money you’re confident you’ll be able to pay back.
Depending on your personal situation, you may need car insurance, home or renter’s insurance, or life insurance. And everyone needs health insurance.
Studies suggest that more than 60% of all bankruptcies in developed countries and emerging markets are related to medical issues, so strive to have at least minimum coverage.
But remember that the purpose of insurance is to protect you in unfortunate scenarios. In exchange for protection, you make regular payments to an insurance company called premiums.
Premiums are guaranteed and often ongoing expenses. For smaller valuables, like electronic devices, you may want to skip insurance if you can afford to replace them because paying for coverage you might never use can be a waste of money.
Realistically, just saving isn’t likely going to be enough to reach your retirement goals. Investing can help grow your money over time.
As you can see, on average if you invested R10 000 in stocks in 1975, by the end of 2018, your investment would’ve been worth over R1 300 000.
How can R10000 grow so fast? Over time, compound interest, which means earning interest on interest, can help investors experience exponential growth or growth that occurs at an increasingly rapid rate.
ConclusionRemember: When budgeting, consider focusing on the big-ticket items. When setting savings goals, be specific about your plan to help you get there. Avoid high-interest debt and loans for items that will quickly lose value. Avoid insurance for expenses you can pay for out of pocket. And finally, consider investing for retirement.
While there’s no shortage of personal finance advice out there, cutting through the noise to focus on high-impact adjustments can potentially have an enduring effect on your financial future.