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The reality of economic inequality in South Africa is a pressing social issue that needs to be addressed on many fronts, but an individual can still start to make a difference to his or her own personal finances by taking seven essential steps, according to Lizl Budhram, head of advice at Old Mutual Personal Finance.
She said the World Bank recently reported that SA is the most unequal country in the world out of 149 countries surveyed.
The most recent Old Mutual Savings and Investment Monitor found that 40% of respondents indicated that they have no kind of formal retirement savings at all. A third (33%) nevertheless believes that the government will take care of them when they are no longer able to take care of themselves.
“Speak to a financial adviser about developing a financial plan that is relevant to your individual needs, so that you can live within your means today while still providing for your future,” says Budhram.
She offers 7 practical steps to get on track to financial freedom:
1. Budget
Start off by drawing up a monthly budget. Knowing where your money is going 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," says Budhram.
2. Pay off your most expensive debt.
Reduce the debt that costs you the most interest, such as store cards.
3. Long-term goals
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 in which to invest, which means that you can take advantage of compound interest.
4. Medium term
For the medium term, save something each month towards an emergency fund. This will avoid you 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. Instead of saving your money in a savings account at the bank, why not explore the option of investing in a tax-free savings account that makes the most of your savings?
5. Protect against loss
Protect yourself against loss of income due to death, disability and critical illness.
Income protection is a critical part of being financially empowered. You should also consider protection against medical expenses as well as short term insurance for your assets - car, building and household contents.
6. Short-term 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?
7. Valid will
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.
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