5 Rules for financial freedom

Financial freedom can be defined, in these tough economic times, as having enough money to cushion yourself against crises; and experiencing little financial stress. Good money habits can solidly set you on the path to success.

Five rules that will help you achieve financial freedom, and enjoy a debt-free life of wealth accumulation:

1. Set financial goals

Sylvia Walker, author of Smartwoman: How to Gain Financial Independence and Create Wealth, notes that financial goals should be set across three main time horizons. These include:

• Short-term goals, such as setting up an emergency fund, or paying off a small debt
• Medium-term goals, such as saving up for a holiday in a few years
• Long-term goals, such as educating your children or saving for retirement

It’s important to set SMART goals – those that are specific, measurable, achievable, realistic, and timely, says Walker. This formula ensures that you can take steps to achieve what you want, rather than just dreaming about it.

“Financial goals are stepping stones to financial freedom,” says Cherise Erasmus, a financial planner at Crue Invest. “Having small, easily attainable goals can make it easier to reach bigger goals.

“For example, if you want R20,000 for a year-end holiday, set a goal of saving R1,818 a month for 11 months of the year so you have the amount you need in December.”

2. Spend less than you earn

Ideally, you should get into the habit of spending frugally from the day you receive your first salary, says Walker, so you never get used to living on your full income.

“Get into the habit of paying yourself first – make your savings automatic via a debit order and add yourself to your list of creditors to pay each month,” she recommends. “Never spend first and save only what’s left over, because there will seldom be enough.”

Erasmus says spending less than you earn enables you to set achievable financial goals. “The best way to avoid spending more than you earn is to set and follow a budget, and leave your credit card at home unless you’re a very diligent spender.”  

3. Get rid of bad debt

Bad debt attracts high interest, and you rarely have worthwhile assets to show for it, notes Erasmus. She recommends paying off high-interest debts first, and paying more than the minimum amount due on your credit- or store card to save on interest.

“All debt that is incurred on something you consume, such as food, clothing or personal loans, is unproductive debt,” says Walker. “Tackle your debts one at a time and pay what you can. Don’t be impatient – it may have taken you a few years to get into debt in the first place.”

She suggests you incentivise yourself with a reward once you’ve paid off your debt, such as a spa day – provided you pay for it with cash.

Erasmus makes the important point that what may seem like a bad debt can be a necessary expense, for example, using a store card to purchase professional-looking clothing when you start a job. Establish what you consider to be necessary debt as it will differ from one person to another.

4. Create an emergency fund

“During the pandemic, many of us learnt that an emergency fund can go a long way in a crisis,” Erasmus says. “It can fill the gap when your income is reduced or you’ve been retrenched, and help with unforeseen expenses such as your geyser bursting or your car breaking down.”

Without an emergency fund, you will be tempted to dip into credit in a crisis, which can plunge you into debt. “Having a financial buffer means you can focus on getting through a stressful event without the added pressure of worrying about money,” Walker says.

To achieve this, it’s worth applying the pay-yourself-first principle, preferably depositing in a separate bank account. Don’t tie your money up in an inaccessible savings vehicle, such as an investment account. A savings account with your bank is the simplest option.

Tip: Debt is a major factor that inhibits financial freedom. Find out more about debt consolidation here.

5. Acquire income-generating assets

An income-generating asset is something that will produce cash flow for you in the future, which is particularly useful when you are unable to work or you are retired.

“Ideally, you should aim to increase your net worth over time by increasing your assets and decreasing your debt,” Walker says. “You can do this using a combination of growth assets, such as equities, and income-generating assets, such as property, bonds, term or fixed deposits, and cash. You can reinvest your dividends into your investment to ramp up growth.”

Erasmus notes that few people achieve this goal, as you need to save diligently every month. However, investing now means you will not be forced to work beyond the age at which you’d like to stop.

It’s a good idea to speak to a financial adviser about which income-generating assets would suit you best, since some require specialised knowledge.

Tip: Did you know that unit trusts can help you earn investment income in the long term? Find out more here.