With the rising cost of living, 2017 is expected to be a tough year financially for people without a system in place. Regardless of whether someone is earning five thousand rand a month or five million, 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.
There have been many high-fliers who have lost everything because they did not understand the fundamentals regarding finances. Irrespective of the individual's earning potential, the same principles can be used and applied to ensure that the person has a solid financial foundation that they can grow from. Much like building a home, it is vital to start with a foundation and build upwards from there through a process of steps. Skipping a step will result in a shaky structure that will not stand in trying times.
The financial management system of Dave Ramsey called the 'seven baby steps' is an excellent guideline and starting point to help people out of debt and financial stress and into a life of saving and giving.
With the rising cost of living, 2017 is expected to be a tough year financially for people without a system in place.
Most homeowners will know that there are always unexpected life events that happen and require additional funding. Regardless of whether it is a burst geyser or leaking roof, things happen and consumers need to be ready. An emergency fund will ensure that the consumer does not have to go further into debt to fix the problem. As an initial goal, it is good to aim for a savings of around R10,000 as a start-up emergency fund.
Apart from the bond, make a list of all debts from smallest to largest. Debts with the smallest balances are given top priority, as these 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. The idea is to pay off the first debt and then use that money to pay off the second debt faster. This will have a knock-on effect and will help the consumer to clear all their debt in a shorter period of time.
Unlike the initial starter emergency fund, this step is to build up a full emergency fund that covers all household expenses for at least three months, but ideally up to six months. This will ensure that the consumer will be prepared for some of life's larger surprises and will be able to stay out of debt for good.
This step in the plan is to build long-term wealth. With no debt and a full emergency fund in place, it is time to focus on putting money aside for retirement. The money that was once used to pay debt can now be used to build a future. Ideally around 15% of the household income should be invested for retirement. There are several retirement fund options available to consumers, so they should be able to find one that works for them. A broker or financial adviser could prove to be a valuable asset at this stage.
What better way to prepare your children for the future than to invest in their education? University and all the associated fees can be costly, especially in a multiple-child home. Setting aside money for the children's education will put you ahead of the curve when the children leave school and want to study further.
One of the best investments a homeowner can make is to pay off their home loan faster to reduce the amount of interest they pay over the term of the loan. Even a small additional monthly payment can make a big difference to fast-tracking financial freedom for the homeowner. An increase of R500 on a 20-year bond of R1 million at an interest rate of 9.75% will reduce the term of the loan by around three years and save a total of R202,903.
The final step of the programme is to live life and be generous. People who have no debt and no payments are free to do anything they would like to do. 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.
Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa