Who will fund your retirement?

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What happens if you die without a will?

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It’s tax time

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5 financial truisms to take note of

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Is fear of finding out hampering your finances?

Among the many challenges of our modern world, such as information overload and fear of missing out (FOMO), is a relatively new phenomenon called FOFO: fear of finding out. And while FOFO can affect any aspect of our lives, it is particularly evident in people’s financial affairs.

The problem with FOFO

FOFO manifests itself in your financial life in a number of ways – for example, not opening or checking bank statements, accounts or letters from service providers; not taking phone calls from creditors; and not having a budget, or simply ignoring the budget you have.

However, ignoring your financial problems won’t make them disappear – it only makes matters worse. Unbudgeted spending spirals, interest levies and late-payment charges can only intensify your financial challenges.

How to stop ignoring your finances

People tend to fear what they don’t understand, and the financial world is known for its complexity, jargon and hefty penalties.

A sustainable solution to beating financial FOFO would be to gain a better understanding of your financial affairs. This will not only alleviate some of the fears you have regarding your finances, it will also enable you to address your specific financial challenges and lay the foundation for improving your situation going forward. Here are 3 simple ways to get on track.

1. Face your fears
Taking a good look at your financial affairs may reveal that your situation is not as dire as you believed. It will also help you identify the trouble areas that could be easier to remedy than you realise.

2. Book time in your schedule
Ideally, you should spend at least 15 minutes a day on your finances. Set a time – even if it is just 15 minutes a week as a start – to open, check and file your bank statements and the accounts you receive. Begin to draw up a list detailing your income and expenses, as well as your credit agreements with the outstanding amounts and the interest charged. Just starting to make sense of your financial situation will begin to dissolve your fears.

3. Tap into the support
You don’t need to become a financial expert to overcome your FOFO. You can call on your financial coach, who can meet with you once a month or on an ad-hoc basis to provide support. They will help you to understand your financial situation, draw up a budget, consolidate debt and plan for your retirement.

The information is shared on condition that readers will make their own determination, including seeking advice from a financial professional. E&OE.


The path to debt-free living

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How interest rates work

Interest rates have a significant impact on our finances, so it is vital that we understand how to make them work for us.

What is an interest rate?

An interest rate is the cost you pay to a lender when borrowing money.

In our economy, the interest rates originate from the bank rate or repo rate, which is the interest rate at which the Reserve Bank lends to the commercial banks – currently at 6.75%. This is not the interest rate that consumers pay. The commercial banks add more percentage points to the repo rate to determine the prime rate – the rate at which a bank will lend money to its top (lowest risk) clients. Since November last year, the prime rate has been 10.25%.

Most consumers pay a rate even higher than prime. This is expressed in lending agreements as, for example, ‘prime + 1%’. This is called a variable, floating, linked or fluctuating rate because, as the repo rate increases or decreases, so will the interest you pay. For example, if you have a loan agreement with a variable rate of ‘prime + 1%’, you will now be paying 11.25% (10.25% + 1%) on that loan. However, if the Reserve Bank raises the repo rate, the prime lending rate will also rise and the interest you pay on your loan will also increase.

Some loan agreements, such as a home loan, allow you to negotiate a fixed rate that is not linked to the fluctuating prime rate. However, this comes at a cost.

How the interest rate affects you

When consumers pay less interest, they have more money to spend, which can create a ripple effect of increased spending throughout the economy.

The lower the interest rate, the more willing people are to borrow money to make big purchases, such as houses or cars, which stimulates the economy. Conversely, the higher the rate, the more interest you earn on your savings. In addition, when it rises:

  • Home loan repayments increase
  • Your instalments for all other loans increase – vehicle finance, personal loans, overdrafts, credit cards, store accounts
  • The cumulative effect of an increase in bond repayments (often the biggest expense) as well as all other short-term loan accounts will impact significantly on monthly cash flow

How to make the interest rate work for you

  1. When you take out any kind of loan, be aware that the interest amount on the loan will need to be repaid over and above the original sum of money you borrowed. Consider if it is a good investment: in some cases, the interest payable is acceptable – for example, on a home loan, which will ensure that you have a property asset and a place to live. However, it makes far less sense to pay a fortune in interest when borrowing money for – as just one example – a holiday or a fancy car.
  2. Know what interest rate you are paying on each of your loans, so you can focus on paying off your highest-interest loans first.
  3. Before you sign any loan agreement, shop around and negotiate the best possible rate, and make sure you can meet the repayments at the current interest rate, as well as after a rate increase.
  4. Contact your credit providers on a regular basis to request a rate reduction.
  5. When choosing a savings vehicle, make sure you are getting the highest interest possible. Even half a percentage point makes a big difference over the long term.

The information is shared on condition that readers will make their own determination, including seeking advice from a financial professional. E&OE.


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