I recently found an article that categorizes you based on your income. According to this, I form part of the middle-class. I decided to investigate what the middle class South Africans are spending their money on. Then to compare my budget over the last 3 months to each item, to identify areas where I am over- and under-spending.
Budget for transport
The biggest expense for the South African middle class is transport at 13.6% of their income. On average, we spend R4 000 per month on fuel (thank you insane fuel prices) and R100 on maintenance. Granted, we had to service our cars in January (R9 000) and we had to overhaul one of the car’s turbo in June (R14 300) which drove up the yearly average significantly. On the flip side however, the first car is paid off and we bought the second car cash. As a result, we have no monthly premiums.
In total 7% of our budget goes to transport. This is below the national average of 13.6%. I thought that the fact that we do not have monthly repayments would put us way below the average. However, we drive long distances for work, which I assume is more than the national average. Also, most middle-class South Africans drive cars on service plans, which reduces the maintenance cost. Ultimately, transport is not a concern for us since the costs are still reasonable. Well, until we have kids and will need to replace one of the cars with something bigger.
For interest’s sake, the rich spend 30.1% of their salary on transport and fuel. Let me put that into perspective for you. The minimum income that classifies you as rich, is R2.36 million. So, the wealthy in South Africa spend R710 000 per year on transport. Let that sink in. Vehicles are the way South Africans show that they are wealthy.
Budget for insurance
Insurance is another big expense for the middle-class. This is a big expense because it finds you. We are bombarded with marketing calls and give into the fear of the unknown. The typical South African spends 12.9% of their salary on insurance. For us this figure is 3.8%, and includes car insurance, life insurance to cover the bonds on our properties, disability insurance, home content insurance and income protection. The monthly car insurance is a bit steep at R1 750. This is because the large engines put them in the performance car section. This is well below the national average and is not one of our main concerns. I’m also in the process of moving to Discovery Insure that will reduce this cost to about 3% of our monthly expenses.
Budget for health and medical
It surprised me how much South Africa is spending on medical aid and medical costs. The typical medical cost for the middle-class South African is 14.7% of their income. This is because of rising medical aid costs and it shows that the middle class is prioritizing their health. The average medical aid spend for the South African poor is 0.1%. Translated, that means they have no medical aid and is dependent on a sub-standard public health system. It also explains why the government is planning to implement a state medical aid. How effective this will be, remains to be seen.
For us medical costs accounts for 8.6% of our budget. We only have hospital plans, which are significantly cheaper than medical aid plans that include savings. This allows us to firstly claim the medical aid costs and secondly the additional medical expenditure back from SARS. This is not possible if you have day-to-day benefits in your medical aid plan. The regulation for this has changed this year and you will need to have massive additional medical expenses before you will be able to get a tax break. I thought that we would be above the national average here, since we regularly have medical expenses and my wife recently went for a ankle surgery. However, compared to the national average our medical expenses are low. I assume that this will also increase once we have kids.
Budget for groceries and dining
For the middle-class, food represents 11.4% of their monthly expenses. Interestingly, for the low-income households, this represents 35.9% of their expenses. This goes to show how much the poor are affected by changes in food prices. We spend about 8.9% of our income on groceries and dining. However, when I travel for work, my food is subsidized. Our real monthly food cost will be much closer to the national average.
Budget for entertainment
The middle class budget for entertainment is 8.3% of their income. This is a vague category to analyse. It will include things like going to a cinema, hosting get togethers and who knows what else. We include our travel costs in this category as well, which increases it significantly. In the last three months we went to the Drakensberg (about R5000 for the 4 days) and we paid for the Egypt vacation in December (about R22 000 for 9 days). We are overspending on travel, but to me it is important to see the world and experience other cultures. It is however something I can monitor closer to ensure that the costs stay reasonable.
Budget for home expenses
The middle-class spends 10.9% of their monthly budget on housing, water, electricity, maintenance and furniture. This is where we are seriously overspending. Our living expenses account for 18.2% of our budget. This is because we made the classic mistake of buying a home for future us, and not present us. This left us with two options, selling our home or paying like madmen to reduce the outstanding amount and associated mortgage.
We love the place and opted for the latter option, although it is by no stretch of the imagination the best option. The additional payments we have made in the last year, has reduced the mortgage by R3 500. The motivation is that when your mortgage is systematically reduced, your savings rate increases, and the repayment process is accelerated. By my calculations, we have about 4 years of payments left. After this we will be living rent free for the rest of our lives.
Budget for savings
This is arguably the most important line item in a budget. How much is left at the end of the month? The South African savings rate is 13.8% and at this point we’re at 23.7%, trying to increase it even more. I did a blog post on how your savings rate influences your retirement horizon if you want to read more about this topic. Make sure that you budget for saving. Make it ambitious and make it your first purchase for the month. The comparison of these figures can be seen in the figure below.
It is evident that my problem spending areas are entertainment and housing. I am content with spending extra to see the world. After all we must live for the present while planning for the future. We’re also actively working on our excessive housing cost by paying extra into our bond. Feel free to compare your cost to the national average to get a sense of where your money is going and where you can save.
Be safe out there,