Rands and Sense

Introduction to Personal Finance

Personal finance is about managing your money through budgeting, saving, investing, spending, and planning for your financial goals. It involves understanding how your financial choices impact your life and balancing current needs with future needs. Good personal finance helps you achieve goals like buying a home, saving for education, preparing for retirement, and handling daily expenses, while also preparing for emergencies.

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Right now, as you get flats on your property and a new income stream, personal financial planning is crucial. It will be just as important in 10 years when you start receiving 100% of the rental income after your partnership with Bitprop ends.

Scenario

Background: You own a home and have started renting out the flats on your property with Bitprop. You're in your early 40s and have started to think about your retirement plan. In 10 years, when the partnership ends, which option do you think is best?

Option 1: Use the rental income to buy another property to rent out. This could increase your monthly income, but you would need to take a small loan.

Option 2: Use the rental income to save towards your retirement savings accounts. This is done via an investment account with your bank with less risk and no additional debt.

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There is no right or wrong answer to the scenarios above. The main goal is your retirement plan. Both options can give you more money for retirement, but one requires you to repay a loan. If you are ready to do that, it’s a good choice. Personal finance is about your present situation but also shapes your future. It's personal and unique to you. Your experiences and choices are important as you plan for your and your family's future.

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Personal finance is crucial for several key reasons

• Financial Security: Builds a safety net for emergencies, protecting against unexpected costs, like hospital visits, and financial slump.

• Achieving Financial Goals: Enables setting and achieving goals like education funding (university), and retirement through structured saving and investing.

• Debt Management: Helps manage or avoid excessive debt, use your credit responsibly and repay any debt on time.

• Long-term Wealth Building: Smart investments in stocks, real estate, and retirement plans.

• Improved Quality of Life: Reduces stress from financial trouble, improving overall well-being and happiness.

• Financial Independence: allows independence from employment by creating enough income, allowing you to pursue personal aspirations.

In essence, personal finance is a central detail for controlling your financial future, making sure of stability, and improving your quality of life. Thinking about your personal finances in this way is always important and useful, regardless of what stage of life you’re in, or what state your finances are in. Now especially, as you are about to get flats on your property that provide you with a new income stream, it is a good idea to reassess your personal finances and do some planning for the future. We will walk through this process over the rest of this chapter.

Assessing Your Financial Situation

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Understanding income and expenses

Before doing anything else, let’s get an understanding of your finances. A lot can happen in a month and with money flowing in and out of your accounts, it can be frustrating to understand what your financial situation actually is. Because of this, it is valuable to map out your finances - everything can broken down into income and expenses.

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Income is any money that you receive, whether a salary, pension, grant or now your new rental income stream. Expenses are what you spend money on: the major expenses for most people are bond payments, car repayments, and insurance or funeral cover. Other expenses include day-to-day expenses such as groceries, school fees and transport.

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Take some time to list all of your income and expenses below - let’s assume you are already receiving your 15% rental income. You should have received an estimate for how much you will receive each month assuming all of your flats are full. If you are not sure, reach out to Bitprop before completing this exercise!  Please note: this is only visible to you so feel free.

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You may have done something like this before, or it might be the first time. Either way, it is always useful to map out your income and expenses. Take some time to look at what do you notice? Are you spending more than you are getting, or do you have money left at the end of the month? Perhaps it is very tight.

Right now - it's not too important, you have completed the first step: assessing your finances. From here, we have the information we need to set goals and figure out how to achieve them.

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Budgeting and Controlling Expenses

When budgeting - your main goal is to ensure you’re not spending more than you earn each month. If you are, don’t worry—it’s common and fixable with planning and discipline. If you’re already balancing your income and expenses, or saving some each month, the next step will help you save more, set new goals, and improve peace of mind.

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Our focus will be on controlling expenses, as income is harder to change. You’ll soon add rental income to your budget, which will help. Here are strategies to control general expenses, followed by tips on managing debt.

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Strategies for controlling expenses

• Prioritise your spending

Look at all the expenses you have each month- which ones are needs (important expenses you can't not spend on such as your rent or bond, groceries, school fees etc.) and which ones are wants (things you spend on which are nice-to-have, but not essential to survival, such as DSTV, takeout, going to the movies, etc.).

Of the wants, which expenses can you cut out immediately? How much money will you save each month?

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Look at your needs. How many insurance or funeral plans do you have? Is it essential to have more than one?

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Think smartly about your monthly expenses. Remember – money being spent on savings products, such as a pension, is not really an expense. That is positive financial behaviour, try not to touch that.

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• Use the envelope system

The thinking behind the envelope system is a way of budgeting that limits the amount you are able to spend per "category" - you can represent each category with an envelope. For example, a category will be "transport" and the amount you set as the limit for that category is all you are allow to spend on transport. If you reach the limit, restrain yourself from purchasing these items again until the next month. This will help you track how much you are spending for each category manage it.

Use online financial management tools – there are a number of free services available that help you track your expenses and categorise them as you want to. 22 Seven (from Old Mutual) is a good example - if you’d like help setting this up, reach out to Bitprop!

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Debt and more debt

Now onto short-term debt: having multiple debt accounts, like store credit and personal loans, happens often but it is risky. Banks and stores make it easy to sign up to these accounts without explaining the high interest rates. While helpful for immediate needs, this debt often leads to a cycle where you might need to take out more loans to repay the first debt, taking a big part of your income. If you're in this situation, prioritize paying off these debts first.

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Debt review

If your debt is overwhelming, debt review might be a good option but be aware of scams - many people receive calls offering debt restructuring and unknowingly enter debt review. If your debt is hard to manage, partnering with a known and trusted debt counsellor can help. Debt review is your right as a South African consumer. A debt counsellor will contact the companies you have the debt with and create a repayment plan that works for you, pulling all your your debts into one monthly payment. But please be aware, while under debt review, you cannot legally take on more debt.

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Here's a list for you to consider, but please note - you should do your own research to see if the company aligns with your goals:

• Debt Busters
• Meerkat

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You might already be under debt review, or may have been in the past. Do not worry – being under debt review does not affect your partnership with Bitprop.