SEVEN STEPSTO FINANCIAL FITNESS
Choosing to not get into debt feels very empowering, but it needs to be followed by action, cautions Lizl Budhram, head of advice at Old Mutual. Budhram recommends seven essential steps towards attaining financial fitness:
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.
Pay off your most expensive debts first. In other words, reduce the debts that cost you the most interest, such as store cards.
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 to invest in, 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.
For the medium term, save something each month towards an emergency fund. This will prevent you from 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. One good option would be to explore ways of investing in a unit trust account. The 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.
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?
Protect yourself against loss of income due to death, disability and critical illness. Income protection is a critical part of being financially empowered.
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.