If all you know about money is how to spend it, then you’re going to struggle to progress financially and achieve your goals in later life. Understanding everything from how to find the cheapest form of credit to the different investment opportunities that are available is crucial to growing your wealth and making your money work for you.
The good news is that financial literacy levels in South Africa are on the rise, with an estimated 40 percent of South Africans said to be financially literate, but that still leaves plenty of room for improvement. So, what simple lessons do you need to learn to arm yourself with some essential knowledge and get smarter about your money? Here’s our guide.
Distinguish between needs and wants
Unless you have an unlimited amount of money, you must separate your expenditure into needs and wants. Your needs are those items you cannot live without, such as water, heating, food, rent or mortgage costs, clothing, healthcare and transportation. Your wants are those things you should only consider buying after all of your needs have been met. Your wants may include a summer holiday, a night out, a takeaway pizza or a new phone.
Your needs should always have top priority in your personal budget. If you have money left over, you can then think about the things you want, and importantly, put money towards your savings.
2. Understand the importance of saving
Saving is one of the four pillars of financial literacy along with debt, budgeting and investing. Saving is an essential part of financial wellness. Saving well will allow you to enjoy a secure present that’s free from financial worries and a prosperous future. It’s only by saving that most of us can make life’s most important purchases, such as paying for a wedding, buying a house and supporting our children. Without the ability to save, it becomes very difficult to realise your goals and enjoy a comfortable retirement.
3. Create and maintain an emergency fund
When we talk about saving, we usually have a goal in mind, such as saving for a house deposit or buying a car. However, before you can do any of that, you should save enough money to create an emergency fund which is equal to between three and six months of your household income. That fund should only be used to cover unexpected expenses that you cannot afford with your monthly pay. It can also be used to bolster your income if you suffer an illness and are unable to work or lose your job. Putting this money away safely in a savings account is the best to ensure it’s only spent when necessary.
4. Be wary of lifestyle inflation
The more money people have, the more they tend to spend. That’s probably to be expected up to a point. The problem comes when you’re spending money needlessly just because you can. This phenomenon is known as lifestyle inflation. Lifestyle inflation can be incredibly damaging in the long-term, particularly when you have to rely on credit just to maintain a lifestyle that you’ve become accustomed to. At this point, you have to take a step back and reassess what’s important to you. If you’re living paycheck to paycheck and spending your money on fancy cars and lavish holidays, you could have a problem.