Steps towards financial freedom
Owning a home is a long-term financial commitment that requires planning. It is imperative that homeowners have a system in place that will help them get through a rainy day if necessary, says Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa.
"Irrespective of whether someone is in an entry-level job, starting out their career, or an entrepreneur with a multi-million rand company, it is important to have solid financial principles in place to be able to get through the tough times and continue to thrive, even when the economy is not in an ideal state," says Goslett. "Many affluent people lost their wealth because they did not understand fundamental financial principles. Regardless of earning potential, the same principles can be used and applied to ensure that the person has a solid foundation they can grow from. As with a home, the foundation is crucial to the structural integrity. Skipping a step will result in a shaky structure that will not stand in challenging times."
According to Goslett, Dave Ramsey's "Seven Baby Steps" is an excellent guideline and starting point. "Apart from being an accomplished author and talk show host, Dave Ramsey is a personal finance expert who has developed a method to assist people to get out of debt and financial stress and into a life of saving and giving. As a successful real estate professional who lost everything and had to start again, he has first-hand knowledge on how to reach financial freedom from a difficult situation," says Goslett.
Here is a guideline to the seven financial steps laid out in the programme:
Create a starter contingency fund
Unexpected life events happen and often cost money, especially if it has to do with the home. While insurance will cover a large number of possible events, it won't cover everything, so homeowners need to be financially prepared. An emergency fund will ensure that you don't have to go into more debt to fix the problem. Aim for saving of around R10 000 as an initial start-up emergency fund.
Get rid of debt
Focus on paying off debts, starting from the smallest balance and working your way up. Debts with the smallest balances are given priority because they can be cleared off the list far more quickly than larger amounts. If two debts are similar amounts, then the one with the highest interest rate should be paid off first. Once a debt is paid off, use the money you were paying as the instalment to add to the next debt to pay off the second debt faster.
3-6 months' savings
Now that the debt has been paid off, it is time to build a full emergency fund that covers all household expenses for at least three months, but ideally up to six months. This will financially prepare you for some of life's larger surprises, allowing you to avoid getting back into debt for good.
Put away for your golden years
Many South Africans don't have enough money to sustain themselves when they retire. If you have paid off your debt and have a full emergency fund, it is time to shift focus to putting money aside for retirement. The money that was used to pay debt can now be used to build a future. In an ideal situation, a minimum of around 15% of the household income should be invested for retirement. There are several retirement fund options available, so you should be able to find one that meets your criteria. A financial adviser could prove to be a great resource at this stage.
An education fund
Tertiary education and all the associated expenses can be costly, especially if you have more than one child to think about. While investing in their education is expensive, there is no better way of preparing your children for the future. Even if you don't currently have children, putting money aside for education will put you ahead of the curve.
Pay off your bond early
Over the term of a home loan, hundreds of thousands of rand is spent on paying the interest. You can vastly decrease the amount of interest you pay by increasing your bond payment to reduce the term of the loan. Even a small additional monthly payment can make a big difference to fast-tracking your financial freedom as a homeowner.
An increase of R500 on a 20-year bond of R1million, at an interest rate of 10,5%, will reduce the term of the loan by almost three years and will save you
Live life and be generous
The final step is to live life and be generous. Exercising discipline for a few years will set you up for the rest of your life. Continue to set goals and budget every month, but have some fun along the way.