4 Steps to Financial Security in a Troubled Economy

financial security

Taking steps to ensure your financial security is air-tight has become an urgent priority. As the cost of living climbs daily, the worst financial mistake you can make is to be in denial over the very real threat of over-indebtedness. In the wake of countrywide drought, aggressive inflation, an increase in fuel prices and an electricity tariff hike, an increasing number of South Africans are finding themselves in deep financial trouble.

Moreover, as inflation accelerates relentlessly, it looks as though the South African Reserve (Sarb) won’t be easing up on the interest rate hikes any time soon. South Africans simply cannot afford to be in debt anymore.

Consumers should brace themselves for the perfect economic storm. The cruel reality is that you will land up in hot water, unable to afford even the basics, if you don’t do something to reduce your debts post-haste. The silver lining is, if you are honest with yourself about your situation and take action straight away, you have a good chance of weathering the storm and coming out relatively unscathed.

Here are four steps to take at once in order to determine whether you are at risk and to help you lock down your financial security during these trying times.

 

Step 1: Get Real with Yourself

Often, the root of financial trouble is a simple case of denial or ignorance of what you are really spending. It’s always those small, seemingly negligible amounts leaking out daily that get you in the end. To get real with yourself, do a little experiment – track every cent you spend for a month. You can either use a budgeting app to do this or just keep a little notebook on you and jot down what you spend.

Most people find their expenses to be a great deal higher than they expected, after doing this little test, as their budgets don’t capture all of those small expenses. How can you craft an honest budget that will help you regain financial security, if you don’t know exactly what you are spending?

 

Step 2: Craft an Honest Budget

Financial advisors will tell you time and again, the importance of having a realistic, accurate budget cannot be stressed enough, particularly during troubled economic times. Consider the gauges on your car. Is it possible to get from A to B safely, without monitoring your speed and fuel tank? Problems would and do ensue, when driving fast and loose, without tracking these crucial gauges.

The same applies to budgeting. A budget is a gauge of your finances, so you can buy what you need to make it through each month safely. Monitoring how you spend what you earn will allow you to make the necessary adjustments to ensure you come out. This way, you can comfortably live within your means and achieve financial security.

A useful budgeting trick is to list the expenses in your budget in order of priority. High-priority expenses include your rental, mortgage instalments, insurance premiums, debt repayments, medical aid premiums and utility bills. These expenses are high priority, as not paying them will damage your credit score and result in legal repercussions, among a whole host of long-term negative effects.

Low-priority expenses include subscriptions, entertainment and clothing. The peace of mind that comes with knowing you will be able to food on the table is well worth cutting back on these trappings. Indeed, stripping away the excess can be quite liberating. After organising your budget, you will be able to determine whether your budget has room for any future price increases, which are inevitable, or whether you need make some.

 

Step 3: Eliminate Debt

Debt is a big threat to your financial security, as repaying it is a long-term, costly affair. The prime lending rate is currently at 10.5%. After two recent hikes, Sarb will only continue to raise interest rates as inflation surges unchecked. Whether you are teetering on the financial brink or are already in the red, now is the time to make eliminating debt a must, to ensure your financial security is not comprised.

Here are some tips to help you eliminate debt more quickly:

  • Prioritise – Just as you do with your budget expenses, list your debts in order of priority. Put high-interest, expensive debt, such as credit cards and store accounts at the top and low-interest mortgage bond payments at the bottom. Short-term debts have higher interest rates, which means they will grow quickly as time goes on, so you need eliminate these debts as soon as possible to avoid paying a lot more.
  • Negotiate – if you are struggling, approach your bank and credit providers and negotiate your debt repayments. Don’t just stop paying, as this will lead to serious legal action being taken against you. Your credit providers would far prefer you make lower repayments over a longer term, than not pay at all. Another option is to request a ‘payment holiday’ on your bond instalments. It’s possible to arrange for lower payments over a certain period of time or an extended term. Then, you can channel this extra money into your short-term, high-interest debts until they are settled, eliminating additional interest charges. You can also negotiate with your insurers to get your premiums down.
  • Cut Back – Cut out inessential expenses, like movie tickets, dining out and paid TV subscriptions. Channel this money into your debts. Remember, once your debts are paid off, you will have more money to play around with every month, as you won’t be making costly debt repayments anymore.
  • Extra Income – Consider selling belongings you no longer use, clothing you don’t wear anymore or jewellery you’re tired of. Use this money to put a dent in those debts. If you are struggling, search the internet for extra earning opportunities, they are everywhere – you have only but to look.
  • Savings – the interest charges on debt accumulate more quickly than interest grows on savings. So, it makes sense to use your savings to eliminate debt. Once your debts are paid off, you can really begin to save. Just be sure to resume saving or investing as soon as you can.
  • Downgrade – If you are tipping into over-indebtedness, downgrading can save you big time. Selling or trading in your car for a more economical, practical model can relieve a lot of budget strain. Just as moving to a flat with a lower rental will free up some much-needed cash.
  • Honesty – if you are in financial trouble, it’s essential to keep your partner and family in the loop, so you can work together to improve your situation as a team. Share the burden – two or more heads are always better than one at finding a solution. Being honest about what you and your family can and cannot afford to spend on will ensure that everyone understands the need to cut back. Moreover, your children will learn a thing or two about how to manage their finances in the future. Older children can contribute financially by taking on part-time work, provided it doesn’t interfere with their studies. Being honest about what you and your family can and cannot afford to spend on will ensure that everyone understands the need to cut back. Moreover, your children will learn a thing or two about how to manage their finances in the future. Older children can contribute financially by taking on part-time work, provided it doesn’t interfere with their studies.
  • Debt counselling – debt counsellors, like those at Reduce My Debts can negotiate with your credit providers to have your monthly repayments consolidated into one lower payment. This will give you some financial relief, not to mention stress relief – as your credit providers won’t be able to demand payments anymore or take legal action against you.

 

Step 4: Devise a Long-term Financial Security Plan

Once you are out of the woods, you need to secure your future finances by focusing on investing and saving again. You may be tempted to reward yourself, after accomplishing your hard-won goal of eliminating debt. But, don’t lose sight of the end game – financial security. Clearly define your long-term goals, i.e. a home, university for your children and a comfortable retirement.

Visualising these goals will discourage you from spending needlessly or slipping back into old, bad habits. Speak to a trusted financial adviser about devising and implementing a long-term financial strategy. This way, you’ll be prepared to handle any unexpected occurrences or expenses. More importantly, it will allow you to achieve your long-term goals of becoming financially secure and free of debt.

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