Build your financial future

Think of it like this: If your house burns down or your car is stolen and you can’t afford to immediately replace those things, then you are vulnerable and need insurance. Or if for some reason you get disabled and can no longer work, then you need insurance that protects your income.

Step 2: Use strong building materials

Debt makes our building materials weak. This is particularly referring to bad debt like credit cards, personal loans, overdrafts and store accounts. Interest rates on these types of debt are scary and are going to be especially bad news for you if you lose your income or your income is reduced in the coming months.

If you can keep your bad debt as low as possible, that means that your building materials - your income - are strong and will keep your house standing.

Step 3: Minimise construction mistakes

We’re human and we all make mistakes. But if you want to build a strong financial future, there are a few building mistakes you should avoid:

• Don’t accumulate debt instead of tackling your existing debt. Interest rates are low. Pay as much of it off as fast as you can.
• Don’t cancel your insurance - you may need it to survive.
• Don’t fall for ‘get rich quick’ schemes and pyramid schemes. There is no such thing to make you rich fast.
• Don’t do nothing. This kind of inaction is going to end badly.

Step 4: Spread the financial load

How do you spread out the financial load? With a budget!

With the right budget, you can cover your needs, your savings and your goals all in one go.

The trick to doing the right budget is to realise that every Rand should have a job. No exceptions. Your budget is the labour camp for your money. Your job is to make sure they all have the right jobs.

With a good budget, you can see what trade-offs you’re willing to make without extending your spending beyond your means and being tempted to accumulate bad debt.

So now that we understand the principles behind good financial planning, what are the practical steps we can start taking today, to build the financial future we’ve been talking about? Let’s dig in.

Practical steps to build a great financial future:

1. Decide on your goals
2. Put your money on a diet
3. Start an emergency fund
4. Get rid of bad debt

1. Decide on your goals

The first step towards building a great financial future is deciding what that future looks like. What are the things you want to have, or do, over the next 30 years? The reason we do this is because once we know where we are going, we can plan on how to get there. Otherwise, your goals are nothing more than wishes.

Think about your goals by dividing them up into specific periods, like this:
1 - 3 years up until 2022
3 - 5 years up until 2024
5 - 10 years up until 2029
10 - 30 years up until 2049

Write all of them down and keep it somewhere safe. These goals might change over time, and that’s fine, but be sure to go back and update that list.

2. Put your money on a diet

When we want our body to be healthy, we need to find a balance between the number of calories we put in and making sure that we get enough exercise. Financial health is no different.

Putting our money on a diet means using just the right amount of money and not overspending on things that aren’t important.

To do this, we like to use a simple principle: The 65-15-20 principle. Here’s how it works:

Use a maximum of 65% of your net income (after tax) to pay for your needs. These are the things that are essential for you to live, like housing, transport, insurance, food, education, and minimum debt repayments.

Use another 15% of your net income towards wants. These are luxuries, they’re non-essential to daily life. Examples of these are entertainment, subscriptions, hobbies, eating out and takeaways, holidays, tobacco, and alcohol.

Finally, put 20% of your net income into savings. This can be split further into 15% towards long-term goals of securing your financial freedom, and 5% for short and medium-term goals (like buying a house, for example). These are things like your emergency fund, retirement, financial freedom goals, long-term dreams, and wealth-building.
The first question many people ask us at this point is, “Where do I find the money to start saving or to pay off debt faster?” The answer is by intelligently cutting expenses.

What does that mean? Here are some examples:

• Cut 20 - 50% of your entertainment spending. This includes alcohol, smoking, magazines and takeaways.
• Renegotiate short-term insurance premiums on your car or home (if applicable to you).
• Review your cell phone, mobile data and internet packages. You really don’t need the swankiest and largest package or cell phone available for your needs.
• Cancel any unused or minimally-used subscriptions, like gym memberships, magazine subscriptions, mobile games and streaming services.
• Look at your bank account package and make sure you only pay for services that you really need.
• When grocery shopping, make a list of what is needed and stick to it. Buy in bulk when it makes sense to do so.

If you are having a difficult time tracking where you’re spending goes, let your financial adviser know and we will share some tools with you.

3. Start an emergency fund

Andiswa spoke about this concept briefly in her construction methods that we covered earlier. An emergency fund is there to cover unexpected expenses in life. For example, a sudden car repair bill, or a medical bill.

When we don’t have an emergency fund, we are forced to cover those unexpected bills by using credit cards or taking out loans. The problem with this is that you can end up spending huge amounts of money on interest!

Bad debt has a habit of spiraling out of control, slowly, without you even realising it.

We believe that your starter emergency fund goal should be R7 500. To get there, we recommend saving R500 a month towards it. The easiest way to make this happen is to set up a scheduled transfer that transfers that money out of your account and into your savings account, the same day you get paid. This saves you from your bad habits and removes the temptation to put that money towards those new Nike running shoes you’ve been wanting.

Open an easy and cheap savings account (check out this nifty account from Momentum), set up the scheduled transfer and remember, don’t touch that money. It’s for emergencies only!

4. Get rid of bad debt

Bad debt is money you borrow from a bank or a store to live a lifestyle that’s above what you earn. So its things like credit cards, store accounts, overdrafts and personal loans. They are sneaky things that can make you a slave to your money and a slave to the people controlling it (the banks and the retailers).

Bad debt has a habit of spiraling out of control, slowly, without you even realising it. This is because these kinds of debts have high interest rates and only actually require you to pay the minimum amounts due on the accounts. When you do that, all you’re doing is repaying the interest on the debt and not the actual credit (the capital) itself. And this could go on for months and months or even years. In the end, you can be locked into paying off twice the amount that you borrowed, and it’ll take you years and years to do. And all of this because you used the bank’s money to fund your bling lifestyle

So, next time you’re tempted to make a big purchase you can’t pay cash for, think twice about it.

The next question then is: How do I tackle paying off my bad debts?

We prefer a method that is known as the ‘snowball method’. In short, this method involves listing your debts from the smallest to the largest outstanding balance, regardless of the interest rates that you pay on them. Then, you make the minimum payments on all of them except the one with the smallest balance. You pay as much as your budget will allow for on that smallest debt. When that one is paid off, you move on to the next one, using the money that has been freed up from the payments on the previous debt, and so on. Repeat until they are all paid in full.

Remember: Little expenses add up. R50 purchases made here and there can easily become R1 000 in a month. That’s money that could’ve gone towards paying off your debt instead of increasing it.