COVID-19 and your personal finances:
We have all be inundated on information about Covid-19 and how it is changing the world as we know it. Let us take your through some of the new realities implicating your Personal Finances due to COVID-19 and how you can respond to those pressures.
I need to adapt to new realities:
- COVID-19 is likely to have increased your need to save cash.
- Reducing your costs is more powerful than making more money.
- Managing your debt wisely offers significant cost savings to you and your family.
Costs and COVID-19:
- COVID-19 is likely to either have increased your costs or reduced your income, or both.
- This will affect your bank balance every month.
- Every Rand saved is a Rand back in your bank.
- For every Rand saved, you make back even more than R1 not earned – and the reason why is tax.
Tax and income:
- For every R1 you earn, it may leave you with as little as 55c in your bank.
- The more you earn, the more tax you pay.
- If you earn an extra R1,000 of income, how much of that is paid in tax depends on how much you earn in that year. The more you earn, the higher the percentage tax rate.
- For example, if you already earn around R350,000 per year, your tax rate on any extra income is 31%. So, if you find a way to earn an extra R1,000, you would pay tax of R310 on that income. That would leave you with net cash of only R690.
- You would be left with even less if your annual income was in a higher tax bracket. For example, if you earned around R500,000 per annum, and you earned that extra R1,000 you would be left with only R640 instead of R690.
- What that means is if you want to buy something worth R1,000 you actually have to earn much more than R1,000 to afford it – because you still have to pay tax on what you earned.
- If you earn around R500,000 per year, you would need to actually earn an extra R1,562.50 to buy something for R1,000. On this R1,562.50 you would then pay tax at 36% (tax of R562.50) – which leaves R1,000 in the bank.
- Key lesson: tax means you have to earn a lot more than you spend. And this problem gets worse as your income level goes up.
- It is much better to save R1,000 than it is to earn R1,000.
- So, it’s worth spending time looking for ways to spend less and there are great benefits to being disciplined in your spending.
- The goal is to unlock the true value of your salary and take-home pay and make it work for you through improved financial habits.
How can I cut costs?:
- Make a list of everything you spend money on in a month and how much you spend.
- Get your bank statements to see every payment you made and put this on your list.
- Try to remember all your cash purchases and put these on the list too.
- Ask your family members if they can think about things any of you buy each month.
- Now add all these costs up.
- Now mark each item as being one of the following:
- essential and cannot be reduced; or
- essential but you can reduce this cost; or
- not essential and you could reduce this cost; or
- not essential and you could avoid this cost totally if you really needed to
- For every cost marked b, c or d, write down how much you could reduce it by.
- Add this up to see your total amount you can save per month
- Now, convert this into how much income you have to earn to make your bank account as healthy as saving this cost. Here is how you do it:
- If you earn less than R205 900 in a year, multiply by 1,22
- If you earn between R205 901 – R321 600 in a year, multiply by 1,35
- If you earn between R321 601 – 445 100 in a year, multiply by 1,45
- If you earn between R445 101 – 584 200 in a year, multiply by 1,56
- If you earn between R584 201 – 744 800 in a year, multiply by 1,64
- If you earn between R744 801 – 1 577 300 in a year, multiply by 1,69
- If you earn over R1 577 301 and above in a year, multiply by 1,82
- That is how much you are effectively paying yourself to save those costs.
So, start today and pay yourself as much as you can. If that doesn’t motivate you, nothing will!