Top money tips for financial freedom

Extra money in the pocket or investments in a bank account are surefire ways to financial independence. 

The key to financial independence is to cut down on unnecessary and wasteful spending.

Easy to do

Putting money away “for a rainy day” is easier when it is goal-oriented. A savings goal is the first link in the chain that sets people on the right path to financial security.   

The debtrescue.co.za website suggests the 50/30/20 rule is a good place to start when you are on a money-saving drive.  It says 20 represents the amount you should save, where 20% of income should go towards savings.

There are always emergencies that can crop up in day-to-day life. A car might fail to start, a geyser might need replacing or the kitchen might need some urgent plumbing. Therefore it is important to have a good savings habit.

Keeping finances in the black

10 ways to clear the path to financial independence

1. Maintain strict record-keeping of income and expenses.

Living within means that there will be enough funds left in a bank account once the last few days arrive before payday. A journal that documents the main expenses that have to be settled can be a great help.

The major expenses are, for example, bond payments or rent, hire purchase payments for cars, children’s school fees, annuities, personal and health insurance, etc.

A distinction should be made between wants and needs. While a house or car or your child’s education is a need, a new pair of costly sneakers, when there are two pairs in the wardrobe, is not. The purchase of sneakers or expensive electronics can easily be dispensed if they are already owned.  

2. Running a budget

The secret behind running a household budget is to make sure that debt is kept to a minimum. Sticking to a clear plan is all about tailoring a budget according to needs. Importance must be attached to paying debt in order of necessity. Paying rent or the bond on a home or the HP on a vehicle are examples. An Excel-generated budget is ideal because it lays out in fine detail what the income and expenses are. It is easier to track spending in this way.

Bethebudget.com states a budget should be reviewed a minimum of once a month. However, many people prefer to do this weekly or every time they get paid. In addition, consideration should be given to doing quarterly and annual budget reviews to fine-tune and assess household budgets over longer periods.

The remaining funds left in a household budget after expenses have been settled, and some savings channeled into a bank account, should be at least 10% of net income.

3. Open a bank account

Saving money should be a regular habit for day-to-day living expenses.

Open a separate bank account where money can be saved for unfortunate emergencies. Just like shopping for the best prices at a supermarket, clients should “shop around” for the best banking product tailored to a specific need.

Choose a bank whose reputation for customer care service is of high standing and make sure bank charges are in line with expectations.

Place the bank card for the savings account in a safe place away from any personal wallet or handbag, to avoid being tempted to use it.

4. Short-term investments

Money market accounts and flexible market accounts and flexible market instruments allow any client to invest money at the premium interest rate. The bank will add on interest on the capital amount monthly, which becomes available on a monthly or annual basis. Therefore, it is crucial to study the market of lenders and to negotiate the best interest rate with them.

This money is usually available at 24-hours notice and is ideal for those unexpected emergencies. Some banks allow for a tax-free saving investment account that can save a client thousands of Rands each year.

A commitment should be made to save money into the bank account every month. Finance experts believe there must be at least six months’ salary in a money market account.

5. Fixed deposits

Revamping a home or going on a holiday in the future?

A fixed deposit account is ideal for this type of goal where money can be saved over a longer period. Many banks have investment products that payout, with interest, over a fixed period of six months or a year. The money cannot be withdrawn before the investment expires and deposits can be made into the account at any time.

The various banks have different rates of interest which are tied to the SA Reserve Bank’s (SARB) repo rate. This is the rate at which the SARB lends money to the major banks.

If the SARB’s repo rate is pegged at 7% the bank might offer (9%) on any deposit. However, clients can negotiate the best possible rate that would be beneficial to them.

If the fixed term expires, the money can be reinvested at the client’s request. Once the rate of interest has been agreed upon with the bank, it can be withdrawn as negotiated with the bank –usually once every six months, or once a year.

6. Investing 

• Retirement annuity – Only one-third of the money can be cashed out upon reaching the retirement age. The rest must be used to purchase an annuity that contributes to a monthly pension. BusinessLive.co.za states that two out of every three South Africans have no retirement plan and the number who are confident they have a well-executed plan has declined from 7% to 6%.
• Unit trusts – Unit Trusts pool the money of various investors into shares, bonds, and money market instruments. The pool is divided equitably among everyone into portions called units. Each has a price or Net Asset Value (NAV) based on assets held in the fund.
• Stocks - Following history and trends when dabbling in the stock market, is an essential approach to have. A suitably qualified fund broker will do the necessary checks and balances as it trades with securities and collects information about various stocks for clients. So investing in stocks does not have to be high risk if you get the basics right.
• Insurance – Among the many types of insurance policies available to clients, life insurance - or endowment policies - is probably the most important. These policies can also be leveraged against a host of credit options, such as home loans, student loans, and personal loans. A paid-up insurance policy greatly assists credit scores, when a credit application is made.
• Property – A property investment can assist greatly with helping financial stability. Investing in a property portfolio by renting out a second home, is an extra string in the financial bow. The money received from rent can pay towards the bond – and any extra money put into a savings investment account. A second bond greatly assists with boosting credit scores.

7. Access bond

An access bond facility is a way to go when there is enough spare cash around to place into such an account. Most banks make allowance for this type of account among homeowners who have a mortgage loan.

Placing more money above the installment amount into the access bond is advantageous because it means paying interest on a smaller capital amount throughout the loan period. It also doubles as a savings account. And, while the surplus amount is in the bond, the bondholder can withdraw the extra funds at any time. These funds, if withdrawn, can be used in any day-to-day emergencies.

8. Loans

The Banking Association of South Africa (Basa) says applications for loans were expected to peak, due to the prevailing business and economic conditions towards the end of last year.

Short-term loans from private lenders are offered typically for any cash emergencies such as a wedding, or funeral, or fixing a car and repayment options are over three months or six months. The major banks can offer these types of loans to be repaid over periods of one to two years.

Mid-term loans are for those bigger projects in the pipeline. These loans are typically payable over one to three or four years and can be used for paying school fees, starting a business, buying stock, or making a property adjustment. 

Long-term loans are suitable when planning to buy a home or a new vehicle, or making major adjustments to a property. The amount of the loans might vary among banks and private lenders. Banks can offer home mortgages to those who can afford it, up to millions of Rands.

The repayment period could be up to 30 years or more.  Lenders, on the other hand, will offer bigger loans of up to R500,000 payable over 10 years.

9. Entertain wisely

We've all heard the saying by now: “all work and no play make Jack a dull boy”. A tight household budget does not mean there should be an absence of enjoyment and fun.

Some financial gurus say that 25 to 30% of household income should be spent on entertainment.  However, self-control is also a very important factor to consider. Income-earners can’t spend what they don’t have.

Money can be saved by cutting down on unnecessary entertainment and spending. For example, to save for that car purchase being planned, less could be spent on clothing and dining out each month.