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This week we take a look at some important financial principles to observe if you want to create wealth rather than just survive from month to month.
If you start following even one of these, it could make a big difference to your finances in the long term.
GROW YOUR EMERGENCY FUND
We tend to think of an emergency fund as just a short-term financial goal to help in a sudden crisis – like a major medical expense, a roof collapse or a car breakdown.
But an emergency fund can achieve much more if you allow it to grow long term and could also finance something that’s not a crisis, for example buying equipment for a home business instead of taking out a loan for it.
Ways to boost your emergency fund include, for example, paying part of your bonus money or any windfall into it; or as soon as you get a salary increase, to also increase contributions to your emergency fund.
Ideal storage places for emergency funds are liquid investments, meaning the money is available quickly.
Bank savings accounts don’t offer much growth, but you can ask a financial planner to recommend a unit trust that’s not very risky – unit trusts pay out in between 24 and 48 hours.
PAY OFF YOUR DEBT
Even taking into account the difference between good debt (student and home loans) and bad debt (clothing accounts and credit card debt), at some point in life all debt becomes bad debt when it mounts up, warns financial adviser Jeff Rose.
There are a multitude of benefits of getting rid of debt – all interest paid on debt is money you can use for something else.
The more debt you pay off, the greater your control over your income. If you feel overwhelmed by your debt, first try to work out exactly how much you owe and to whom you owe it.
Keep a supplemented list of all your debts including creditors, total amounts, monthly payments and deadlines.
A spreadsheet or app on your phone can be very useful because it will encourage you to keep your financial responsibilities up to date.
The National Credit Regulator (see Get More Advice below right) also recommends debt counsellors.
START THINKING ABOUT RETIREMENT
The earlier you start, the bigger the growth potential of your retirement savings. If at age 25 you start putting away money at a return of 12%, by the time you’re 55 you’d have saved almost R6 million.
But if you start at age 30 with the same amount, by age 55 it’ll be worth only just more than R3 million.
It also helps you to be prepared should you be forced into early retirement by poor health or even if you’d just like to retire earlier.
STOP HOARDING THINGS
Most people have a weakness for certain types of purchases, but these things – whether it’s handbags, stationery or shoes – can become a financial parasite, Rose says.
Typically it’s things you like and believe you’ll use even if currently you don’t need it.
You could end up spending a fair slice of your income on your need for such things, because it’s almost like an addiction. Make it a financial goal to stop such habits.
LIVE WITHIN YOUR MEANS
To really create wealth, your expenses shouldn’t exceed your income. To achieve this you have to create and stick to a budget.
There are apps available that you can download on your phone (22seven, Budget App & Spending, Tracker, Goodbudget) to help you budget.
If you can’t cut your expenses, you should get another source of income.
FIND ANOTHER INCOME STREAM
Extra income can help you live within your means when your expenses are too big. The extra money earned can settle expenses without going into debt, or be saved.
It’s also a buffer if ever you were to lose your main income stream. Many people do extra work for this purpose, like administration, online writing or selling products such as jewellery or baked goods.
TAKE CARE OF YOUR DEPENDANTS
What will happen to your family or other financial dependants when you can no longer work, or if you die?
Make sure you have a will. Ask an expert like a chartered accountant, trust company or lawyer to help you draw it up in a way that it can easily be settled.
Financial advisors can help you with life cover and disability cover.
If you die, life cover can be used to provide financial care for your loved ones and settle debt, while disability cover provides for expenses if you’re unable to work due to injury or illness – temporarily or permanently.
GET MORE ADVICE
- The National Credit Regulator: 0860-627-627 (ncr.org.za)
- Financial planners: fpi.co.za and fia.org.za.
