Understanding your financial health

There are a number of elements that influence your financial health. Understanding and proactively managing them will go a long way towards securing your financial future. We have provided some useful information on relevant issues to help you manage your finances.

Household income

Sound financial management starts with gaining a good understanding of your household income and expenses.
Household income is the combined incomes of everyone sharing a household. This often means a couple who are both “income contributors”, but can include any household member who contributes. Household income includes every form of income such as salaries, wages, rental income, retirement income, investment gains, and child support, amongst others.

Household expenses

Household expenses refer to living expenses such as rentals, mortgage payments, utility bills, groceries, and others. These expenses can be categorised in various ways.

These expenses may be either “fixed” or “variable”. Fixed expenses are expenses that are generally the same each month, usually contractual in nature and cannot easily be changed. Mortgage, health insurance, life insurance, car insurance, homeowner’s insurance education fees are examples of fixed expenses. Variable expenses are those where the amount is not constant and varies from month to month. Examples of variable expenses include groceries, fuel costs, utility bills and entertainment. Although many variable expenses are essential and unavoidable, individuals generally have more control over these types of expenses and the flexibility to reduce them if necessary.

Budgeting your expenses

A way to effectively manage your household’s income and expenses is to create an itemised budget. Although there are many approaches to creating a budget, a good place to start is to keep a record of your income and expenditure over the last few months and then to calculate a reasonable monthly average. With this information at hand, you can prioritise your expenditure, making sure you are not living beyond your means, and focusing on the payments that are essential. This will make it easier to know what expenses you could cut back on.

The importance of your credit score

A credit score in an indicator to lenders of a prospective client’s credit worthiness. In general, the higher the credit score, the better the perceived credit risk and the more likely it is that lenders will extend credit at favourable terms. Conversely, if a poor credit score is calculated, a credit application may be declined, or credit may be extended at higher interest rates and at less favourable terms and conditions.

Maintaining a good credit record may provide easier access to credit. It is important not to become financially overextended, so financial commitments must be carefully planned and credit agreements entered only if it is really necessary.

How to maintain a good credit score:

• Bills should be paid on time, every time.
• Don’t be tempted by easy credit.
• If you are unable to meet your obligations it is important to contact your credit provider to discuss repayment options.
• It is also important to protect yourself against identity fraud. Criminals that have gained access to your personal information may use it to obtain credit fraudulently.
• Although credit scores change from time-to-time and may even improve with good financial conduct, certain types of information, such as default listings and judgments, will remain on record for a period of time and may even limit access to new credit facilities.

You can contact a credit bureau to access your credit record, the information is usually provided once a year for free or at a minimum cost.

The importance of bond protection

For most people, purchasing a home represents the single biggest investment, and is usually financed through a home loan. Although most homeowners would like to pay off their home loan in the shortest time possible, it usually takes a number of years. Until then, unforeseen circumstances such as death, disability or retrenchment may impact on your ability, or in the case of death your surviving spouse or family member’s ability, to meet the home loan repayments. Without proper insurance protection, a real risk then exists that the home loan will go into default with little prospect of recovery.

We therefore encourage our clients to have sufficient life cover in place to protect your family against these untimely events. To ensure that you select the cover that is right for you, financial planning advice should be sought from a FAIS accredited financial planner.

The SA Home Loans Bond Protection Plan is also available.