Managing your personal finances can be a complicated process that most people have trouble with it at some time or the other in their lives.
Finances don’t have to be overwhelming, and there are ways to help you feel more in control of your money by being informed that will keep you on top of things.
Nina Appelgren, personal finance expert at Lånea, answers some the most frequently asked questions about personal finance.
How do I create a budget?
Creating a budget can help people keep track of their money accurately.
When it come to tracking your income, you should also include bonuses, any income from side hustles or freelance work, and any benefits that you may receive.
Then compile a list of all your potential monthly expenses including your rent or bond repayments, groceries, insurance, subscription services and discretionary expenses.
Prioritise the essentials and don’t forget to factor in savings. Ideally, you can save 10% to 20% of your annual salary.
You can also use spreadsheets or budgeting apps to help track your finances.
What are the best ways to save money?
The first thing to do is look at your budget and see what expenses you can do without like unused streaming services or other regular subscriptions that you no longer need.
You can also incentivise your savings by setting up saving goals. Your savings goals can range from planning to put money into an emergency fund to a holiday fund and even a new car. Having a goal will help you stay motivated as you see your money grow.
You can set up automatic transfers which can easily allow the money to flow from your current account to your savings account.
One of the best ways to save is by being savvy when shopping. Look for deals, use discount codes and compare prices between shops and wait for sales if possible. Most importantly, think about whether you really want or need a purchase.
What is a good credit score?
Credit scores fall between 300 and 850. Good is generally considered around 670-700 and up – 800 and over is excellent.
Having a good credit score will make you more likely to be approved for loans which you will need for big purchases like buying a house.
It will approve your access to borrowing and may also have other benefits such as lower insurance and interest rates.
You need to keep in mind that there are different factors that can affect credit scores, such as payment history, credit usage and length of credit history.
Regularly check you credit report, which you have the right to every 12 months from any credit bureau in South Africa as mandated by the NCR and the National Credit Act (NCA), according to Experian.
How to improve credit score?
To improve your credit score, you need to:
– pay your bills on time, as a consistent payment history will keep it high
– reduce any debt where you can and pay them off as soon as possible
– Use your credit cards responsibly and avoid maxing out, and don’t take on more debt than you can handle
– Limit new credit applications and only apply for them when necessary because applying for a lot of credit within a short period can negatively affect your credit score
Remember, if you have never taken out any credit, you won’t have a credit score at all.
Should I invest my money instead of saving?
Investing creates the potential to increase your money over time and receive higher rewards long-term.
However, it is not risk-free, as the value of investments tend to fluctuate, so you should make sure that you are comfortable before proceeding.
Choosing whether to invest or not is a personal decision, and it is not right for everyone. If you want to invest, make sure you have an emergency fund, ideally 3-6 months’ worth of your salary. The emergency fund can be a safety net for unexpected expenses.
Consider your investment goals and the desired time-frame. It’s often better to save for short-term goals, as they are more manageable and require less risk.
Do thorough research on different stocks and bonds to invest in, and make sure you are happy with your choices.
Consult with a financial advisor for personalised guidance so you can make informed decisions and avoid over-investing.
What are the best ways to manage debt?
The first step to dealing with debt is looking at your budget to see where you can cut back and instead put the money to pay off your debt.
It is best to start somewhere manageable, as this will further motivate you to handle these debts. Try to prioritise high-interest debt first to save money long-term and avoid accruing more interest payments.
Look into debt consolidation if you need to, which is where several loans are combined into one. This can make things simpler and may also reduce your borrowing costs and interest rates.
Try negotiating with creditors if you’re struggling as you may be able to agree on a lower interest rate, payment plan or settlement amount.
Don’t be afraid to seek professional help as this may be the best route if you’re overwhelmed by debt.
How do personal loans work?
Personal loans are often used to fund big purchases, unexpected expenses, debt consolidation or other payments that you can’t afford.
You will have to apply through a bank, credit union or online lender. Info about credit history, income, debt and employment will all be relevant to how easily you can receive a loan. Your application will be assessed and approved based on factors such as these.
If you’re approved for a loan, you will be sent an offer with terms. This will include the loan amount, interest rate, repayment schedule and fees.
After accepting, the loan is issued to you, usually through direct deposit into your account. You can then work towards repayment through a monthly repayment schedule with a fixed interest rate.
How does interest work?
Interest is essentially the cost of borrowing money. In order to make money on loans, lenders charge an extra fee on top of the borrowed amount. This may be a fixed rate or may accumulate with time if the interest rate is variable.
You may have simple interest, which is calculated only on the original amount borrowed, or compound interest, which is calculated on the initial amount, as well as any accumulated interest.
What insurance do I need?
You will need some kind of health insurance or medical aid to cover any GP visits, prescriptions and medical bills.
If you own a car, you’ll need car insurance to help cover costs such as damage. Pet owners may need pet insurance to cover pet medical bills and other unforeseen pet-related expenses.
Life insurance can be taken out to cover funeral costs and income replacement and other expenses after death. If you have a disability, disability insurance will provide income replacement if you cannot work due to your disability.
Homeowners or renters will require insurance to protect property, and there are two main types of home insurance which have different purposes.
Building insurance covers the physical structure of your home and any permanent fixtures, and content insurance covers the cost of your possessions if they are damaged or stolen.
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