Are you financially free?

Thembeka Ngugi, Marketing Executive at Old Mutual South Africa

This year on April 27 the nation will celebrate its 18th year of democracy. There’s no doubt that democracy opened a world of opportunities for many South Africans, but political freedom means little, unless you also have economic freedom , says Thembeka

“The past 18 years have brought massive employment opportunities for many South Africans, but sadly, many have fallen into the debt trap and fallen prey to short-term thinking,” she says. “This trips us up along the way.”

The most recent Old Mutual Savings and Investment Monitor found that only 46% of urban working South Africans are saving for their retirement. What this means, in effect, is that more than half of all South Africans who are currently working will not be financially free when they retire. When you include unemployed South Africans, the number is of course much higher. “If you’re one of those South Africans struggling with debt repayments, despite earning good money, it begs the question: Are you really financially free?”

To become financially free and independent, Ngugi says there are seven essential steps you need to take. “Following these practical pointers should help to get you on the right track.”

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 Ngugi.
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?

Ngugi 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.

“Speak to a financial adviser about developing a financial plan that is relevant to your individual needs, so that you can live within your means today while still providing for your future,” says Ngugi. “We are politically empowered as a nation, now make sure you also enjoy the real freedom that comes with being an economically empowered individual.”