If the national lockdown has taught us anything, it is the importance of sticking to a budget and having emergency savings available should the unforeseen happen. This can be challenging for those whose credit extends beyond their monthly earnings.
“As an affordability rule of thumb, one should not spend more than 30% of his/her monthly gross income on housing. This way, the homeowner or tenant will have enough of their monthly earnings leftover to pay for the rest of their household expenses as well as to make contributions towards savings,” says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.
To help homeowners and tenants create a monthly budget that will reduce the risk of losing their home owing to unforeseen circumstances, RE/MAX of Southern Africa suggests the following tips to become financially prepared for the unexpected:
Step 1: Categorise your expenses
The first step is to find out where you are spending your money. To do this, look at your bank statement to create a list of all your expenses and then break the expenses down into the following categories:
- Unchangeable Essentials: these include rent, insurance instalments, etc.
- Changeable Essentials: these are variable costs such as groceries and petrol
- Inessential Expenses: these include entertainment spending and shopping sprees
- Long-Term Savings: payments towards pension funds and investments
- Short-term Savings: informal savings such as stokvels and emergency funds
Step 2: Cut Back to Save More
If you aren’t already putting away a healthy amount into savings, then you will need to cut back somewhere. Categories two and three in the list above are the easiest areas in which to cut back to make more funds available for your savings. Cutting back on expenses in category one, on the other hand, usually involves doing some research to find cheaper alternatives and the consequent process of switching or cancelling the fixed expense. You can review these if you still are unable to reach your savings goals after cutting back on categories two and three.
Step 3: Set Savings Goals
Setting savings goals is vital. Determine an amount that you would like to put aside each month that will help you afford the various expenses incurred when owning a home. A good rule of thumb is to have two to three months of your salary saved in a readily accessible account in case of an emergency. You can invest these savings into a tax-free savings scheme to help you reach your savings goals quicker – just be sure to find out if there are any costs involved when withdrawing from these accounts.
Step 4: Create a Facility for Crisis Cash
While you are building up your emergency savings, make sure you’ve got some form of credit or overdraft facility set up to use in case something happens and you need access to emergency funding to see you through the crisis. Avoid racking up unnecessary debt by only using this facility if you truly need to.
As a final word of advice, Goslett recommends that the key to avoiding falling hopelessly behind on your debt repayments is to purchase a home that you know you can afford. “For those struggling to find room for savings, it might be time to consider downscaling. I’d recommend speaking to a RE/MAX agent to find out whether selling your home will relieve some of the financial pressure many households are facing right now,” he concludes.
