Avoid starting January with more debt

If you do just one thing this festive season, plan for those 40 days to the next paycheque.

Right now, the best thing you can do for your financial health is to plan for December and January.

In most cases when people write to us with financial difficulties it is because they have failed to plan.

We live in a world that is geared towards immediate gratification and the misplaced belief that things will sort themselves out. We make impulsive spending decisions with the hope that the “future me” will have figured out how to pay for it.

Given the expectations around the festive season, the impulsive spending and “I deserve it” mantra is at its peak, and this is combined with the payment of early salary as companies close for the December break.

Payday loans spike in January

Receiving your salary early at the time you are most tempted to spend is a recipe for disaster – which explains why payday loans spike in January.

While it is a great feeling to receive money early, especially with the financial demands of the festive season, this money has to last you until the next payday which is 40 days away!

You still must make provision for end-of-December bills and January expenses.

The feeling of “Janu-worry” is simply because people have not budgeted correctly and realise they do not have the money to meet day-to-day spending for the whole of January, let alone those extra bills like school fees and uniforms.

This year, do it differently.

Make it a goal to start the new year without additional debt. Before you spend, pay all the end-of-month bills as soon as you are paid. An early payment into your mortgage or vehicle finance has the added benefit of saving on interest.

If you have debit orders that you cannot change, calculate how much you need to keep aside. Make provision for January day-to-day expenses like groceries and transport and those extra costs such as school fees, uniforms and books.

Go as far as putting the money into a savings account linked to your bank account to keep from spending it. Just make a note to transfer the money back into your transactional account before the debit orders are due.

If you receive a bonus, you could use this to pay for your child’s school fees for next year or to pay for major repair expenses on your car, for example. Planning ahead and knowing what expenses you need to meet will help keep you out of debt.

If you are feeling tempted just to spend, close your eyes for a moment and think about how you will feel to start January with a savings account that actually has some money to pay those January expenses.

I promise you, it will be a feeling far more powerful and positive than spending money will give you.

Pay off debt or save your bonus?

Some people have been fortunate enough to receive a 13th cheque, or even a tax rebate. These cash windfalls are a great way to give your finances a boost.

One of the debates is whether or not you should use your bonus to pay off debt. While the logical argument is to pay off debt, some advisers point out that we get trapped into a cycle of spending on our credit cards all year and then hoping to settle it with our bonus, rather than learning to live within our means.

The impact of not investing a portion of your bonus stops us from creating real wealth as we lose out on compounding growth. If you are severely indebted then you may have to use your bonus to keep yourself above water, but otherwise consider using a portion of your bonus for saving and investing.

Here are a few smart ways to get the most of your bonus:

  • Pay your smallest debt and then snowball: Take your smallest debt, pay it off and close the credit facility so you are not back in the same situation next year. Make it a promise to yourself not to use that credit facility ever again. Take the instalment you were paying to that loan and add it to another debt repayment so that you pay off that debt sooner. Keep doing this until all your debts are paid off. This is known as the ‘snowball” effect.
  • Start/boost your emergency fund. One of main reasons we fail to pay off debt is because of emergencies. While we are trying to pay off our credit cards, an emergency forces us to use it again. Aim to have at least R10 000 in a savings account and add to it every time you receive a bonus. The goal is to have three months’ worth of living expenses saved.
  • Start a tax-free savings account for long-term savings. Many tax-free savings accounts such as those offered by SatrixNow, have no minimum deposit, so you can start with as little as R100. If you invested a bonus or tax refund of R5000 each year – it would be worth around R360 000 in 20 years.
  • Pay less tax: Many people are surprised to see how much tax they end up paying on their bonus – especially if the bonus pushes you into a new tax bracket. You can save tax and boost your retirement provision by investing up to 27.5% of your bonus tax-free into your company retirement fund or personal retirement annuity.
  • Make a donation: You can give in the spirit of the festive season and receive a tax break. You can donate up to 10% of your taxable income to any registered Public Benefit Organisation and receive a full tax deduction.

This article by Maya Fisher-French first appeared in  “Maya on Monday”

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