Sylvia Walker, Market Development Manager at Old Mutual
Many South Africans who’ll celebrate Freedom Day this Saturday, April 27 are free to vote but are held captive by debt and see no way to free themselves from it.
Sylvia Walker, Market Development Manager at Old Mutual says: “We must definitely celebrate our democratic freedom, but Freedom Day is also an important opportunity to make sure that our citizens know their financial rights and assert them, while also exercising responsibility over their own destinies to acquire financial freedom.
“South Africa’s consumer protection laws are very robust, but many consumers simply aren’t aware of the extent of that protection. It’s important that people firstly, know their rights and recourse and secondly, feel empowered to take control of their money.”
She notes that millions of South Africans who earn good money are shackled by short-term debt. The Old Mutual Savings and Investment Monitor has found that many breadwinners see debt as unavoidable, a perception reinforced as living-costs like transport, food and electricity continue to increase.
“The current debate about the so-called born-frees and their attitudes to freedom is fascinating, but it’s ironic that many of those who’ve grown up free of oppression find themselves enslaved by “now-ism”: access to easy credit that drives a buy-now-and-pay-later mood. That’s resulted in a debt-to-income ratio of nearly 80%. In other words, for every Rand South Africans spend, 80 cents goes toward servicing their debt.”
Walker adds that in many cases indebted South Africans struggle to pay off the interest on their debt, let alone the debt itself.
Far too many South African consumers fail to consider the impact that their living for today lifestyle has on their future financial wellbeing. “They are living from payday to payday and have no spare money to save,” cautions Walker. “They are either living beyond their means or spending on luxury items that are not necessities.”
“Choosing to not get into debt feels very empowering, but it needs to be followed by action: drawing up a budget. Many South Africans simply don’t know exactly how much they earn or how much they spend. The first step to financial responsibility is establishing how much money comes into your account each month and where it goes.
Walker recommends paying off your most expensive debt first. These include shop cards that charge the highest interest rates. Once you have cleared your debts and are operating on a cash basis, you can start thinking about investing your money for important goals, making your money work for you, instead of you working for your creditors.
Sylvia Walker recommends SEVEN STEPS TO FINANCIAL FREEDOM:
1. Start off by drawing up a monthly budget. Knowing where your money is going to each month is a critical step. “Ultimately, you need to reach a stage where you are in full control of your finances. Drawing up a budget is a simple process, and basically gives you an instant indication of what you are spending your money on, helping you to identify where you can cut costs,” says Walker.
2. Pay off your most expensive debt. In other words, reduce the debt that costs you the most interest, such as store cards.
3. Now consider your long-term goals. Remember that saving money for retirement is your most important long-term savings. It’s a fact that by starting to save early you have a longer period in which to invest, which means that you can take advantage of compound interest. Called the eighth wonder of the world, compound interest means that you earn interest on the interest already earned.
4. For the medium term, save something each month towards an emergency fund. This will avoid you having to go into debt if unexpected situations strike. Ideally, emergency savings should be kept in a separate account to discourage you from dipping into it. Instead of saving your money in a savings account at the bank, why not explore the option of investing in a unit trust account?
Walker explains: “Advantages of doing so include potentially higher investment returns, while still giving you immediate access to the funds. It is important that the returns on your savings exceed inflation, to ensure that the buying power of your rands is not eroded.” However, if your investment goal has a shorter term, it is important not to expose the investment to too much volatility. Equity exposure, for instance, is likely to be too volatile to be suitable for short term investment goals.
5. Now you’re ready to plan for short-term goals. Maybe you plan on travelling in the next few months or perhaps you’d like to buy a new car?
6. Protect yourself against loss of income due to death, disability and critical illness. Income protection is a critical part of being financially empowered.
7. The final step in a financial plan is to draw up a valid will. Your will is a record of how you want your assets to be distributed among your loved ones and how your liabilities should be paid for.
A valid will is an essential element of estate planning and includes everything you own and owe – from property and cars to investments and debts.
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