“The [sentence] ‘how to spend your increase’ is a bit ironic, it’s actually how you should be saving more. Effectively, you have people in different stages of their lives. People getting an increase in their 20s or in their 30s, or late 40s, they’re going to have different objectives and priorities in life,” Brenthurst Wealth certified financial planner Magnus Heystek told CNBC Africa.
“It’s very difficult to provide an exact definitive answer for everyone. We have a golden rule, and this can apply to most people: start off with your bad debts. Try and tackle the credit card debts first, the high-interest short term loans. Get those out of the way.”
Heystek added that those who don’t get the opportunity to have a pay increase end up with growing debt and interest continues to build.
In some cases, many fail to tackle the capital portion and only manage to cover the interest portion of their debt.
“Medium-term loans that people take out [such as] a personal loan, try and tackle those first. Get those out of the way, then you can talk about your bond. If you increase your bond payments, you’re doing yourself a favour towards the end of your payment,” Heystek explained.
“In the initial years, you’re actually just paying off the interest portion of the loan. Just by contributing 500 to 1,000 rand to that bond, you’re going to make a huge difference later in life.”
Heystek however noted that those closer to retirement age struggle to maintain the lifestyle they had pre-retirement.
Maintaining the same level of income one had while working has also been found to be difficult.
“A lot of people are finding it very difficult, so you actually need to make provision and your contributions towards any retirement investments. If you’re not really part of a pension fund, you have options with retirement annuities,” he added.
“You need to increase your contributions and you need to make provisions. You need to ask yourself: will I be able to retire and maintain my [current] style of living?”
Financial planning can be in the form of saving or by approaching a financial advisor to get a framework that will, in the long term, provide a financial cushion without debt.
“Approach a financial advisor to ask the questions, ‘will I be able to retire comfortably, will I be able to take care of my family in retirement. Will I be able to continue paying for medical and other ad hoc expenses?’ It’s a big problem. We just have a feeling that there’s a lot of people out there who haven’t taken that initiative yet and actually said ‘I can retire comfortably.’ It’s a massive concern,” said Heystek.
Financial planning while young is also just as crucial, as one’s early and late 20s are a time when large expenses such as cars and rent become a constant monthly cost.
“A lot of people get into that trap of ‘I’ve got a 10 per cent increase, I can afford to spend more. You should actually be saving that money. Don’t get into the trap of thinking ‘just because I have an increase in salary, now I can spend more,” said Heystek.