Rising interest rates and falling markets are one of the biggest contributors and causes of financial stress and depression. Even if you are a high earner, you could be living far beyond your means.
Growth in property and equities over the past few years has made one feel much richer, but that is only on paper.
One of the reasons that the Reserve Bank increases interest rates is to try and curb consumer spending on credit. This makes it easier to maintain and control inflation. But in spite of nine interest rate increases, consumers continue to spend.
There are consequences to spending. It begins small and collects momentum until one needs to use credit to pay off other credit and the downward spiral continues. Interestingly, as a result of the new National Credit Act, many advertisers are now stating the full price one pays for an item if you buy it on credit. For example, a TV advertised for R9000 bought on terms or credit now has another block in the advert showing the full price of R12000.
Do we give enough consideration to the consequences of our spending and the hidden costs of trying to keep up with the Joneses?
One needs a carefully planned budget, which is manageable and possible to adhere to. To prepare your budget, deduct major expenses such as mortgage bond, car repayments, regular household expenses, education etc, and then check how much is left. From the remainder, allocate a set amount each month for all other luxury spending. Most importantly, set aside a certain amount for savings and never allow your expenses to eat into this. Make every effort to stick to your budget, as each time you exceed it, even a little, you jeopardise your future.
Current statistics reflect that South Africans spend in excess of 80percent of disposable income. If you are spending more than this, then the chances are that you are not putting much into savings. In the long run, this is a recipe for disaster.
One must have a nest-egg amount of three to six times one's monthly salary. This saving should be kept for emergencies and only be accessed in times of need.
A salary is not a guarantee of permanent and future financial stability.
A nest egg for a rainy day certainly provides financial peace of mind. The peace of mind you will enjoy from knowing that your finances are under control and that you are living within your means is much more preferable to the thrill of frivolous spending.
l The writer is a director of Pioneer Financial Planning. Visit www.pioneer.co.za or e-mail email@example.com