How to gain your financial independence

Are you used to getting financial assistance from someone else to tide you over? Well, whether you’re still living under your parent’s roof, or rely on others for help, it’s time to start taking responsibility of your finances.

The truth of the matter is that there is no magical formula or a quick fix but there things you can do to gain financial independence.

Early habits

Savings is a discipline that should be incorporated into your lifestyle from as early as possible.

If you’re a student and not working full time, it’s highly unlikely you’ll be earning wads of cash but if you have a bit of money to spare, Alfred Ramosedi, African Bank group executive of sales and marketing suggests reverting back to your childhood and making use of a piggy bank. It’s no longer a commonly used product but is still effective in that it acts a reminder that small amounts of change can yield to greater gains.   

And if you’re someone who is inclined to spending loose change before breaking a note, imagine the amount of money you could potentially save.

“The only negative to saving money in a piggy bank,” Ramosedi says, “is that you lose out on interest you would get if you deposited the same amount of money into a bank each month.”

 While a piggy bank is a wonderful starting point, it’s imperative that you deposit the money into a real bank account on a regular basis as it assists you in keeping track of your money and what you do with it.

Short-term savings plans/ savings account

Nitesh Patel, head of customer financial solutions: personal banking at Standard Bank suggests that a successful savings strategy consists of four elements: a short, medium, and long-term plan, and an emergency fund.

Short-term term savings plans are adopted when you want to purchase luxury items i.e. furniture or a saving up for a holiday; and the products that are best suited for that are bank savings account as they are relatively easy and quite flexible.

The minimum amount you would require to open up a savings account is R500; it is the most affordable as you receive interest on the smallest balance; and your original deposit is safe.

 “A savings account is the easiest entry level account to start with, particularly if you are living debt free,” says Ramosedi.

He adds, “A notice deposit account is probably the best way to protect your savings from impulsive withdrawals. The monthly deposits are from R100 and you must give the bank at least seven, 32 or 90 days’ notice before being able to make a withdrawal.”

There are no accompanying fees, charges or commissions on deposits attached to these savings products. It’s important do to your research to see what suits you as there are other accounts that are simple but are more controlled and operate with a monthly deposit for at least 12 months.

Medium-term savings plan

A medium-term savings (for between three to five years) plan should be structured around saving for things like a home, a new car or for your child’s university education.

It’s important to be able to differentiate between savings and investing, these are two ways for you to make your money in order to achieve different goals.

“In a nutshell, saving is the short-term practice of putting money away for a goal or unexpected expenses and investing is the long-term strategy of putting money away and letting it grow,” says Eunice Sibiya, manager at consumer education program at FNB South Africa.

When investing your money, there is no set or guaranteed interest, the levels of risk varies but the potential of making a profit is much higher.

Sibiya explains that investing should be the next step after saving in order to make your money grow and provide additional income in the future.

Standard bank suggests that the types of investment products you can consider are unit trusts, ETFS, money market accounts, longer-term fixed deposits, Satrix and endowments. 

These investments force discipline and they require you to pay certain amount of money each month by contract. They are also quite flexible and accessible, except for an endowment, where you are committed to a full term that you have to agree to.

If you are uncertain about where to put your money, John Manyike head of financial education at Old Mutual advises that you speak to a qualified financial advisor. He or she needs to take your needs, affordability and risk appetite into consideration, as there is no size that fits all when it comes to savings and investments.

Long -term planning/ retirement  

Long term planning (six years and longer) is primarily for your retirement savings.  Standard bank suggest saving at least 15% of your income for 25 to 30 years in order to have sustainable retirement income.

Emergency Fund

“This is perhaps the most important plan as this can stop you from dipping into retirement funds in the event of a crisis,” says Patel.

Allow your regular deposits to gradually build up, so that your money can then be used at later stage. It is an effective way to ensure that you are financially secure when facing unexpected circumstances.

Standard Bank advises that you put at least six months of your income into an investment, which can be accessed quickly in case of unforeseen circumstances.

Debt

“One of the main reasons people become over-indebted is that they do not know how to save, so they rely on credit,” says Patel.

Getting your financial independence may seem impossible, particularly if you’re in debt but there are ways of getting yourself back on track financially. Ramsosedi suggests trying out the following:

• List your debt – make a list of your debt with monthly instalments, make sure to keep up to date with these instalments and pay off small debts first. It’s important to make contact with your bank or creditor so that both parties can come to an agreement on a debt solution.
• Budget – draw up a budget on what you need to spend your money on.
• Cash detox – for a minimum of three months, avoid credit cards and make use of cash instead. Create budgeting envelopes i.e. for entertainment, groceries, monthly electricity etc.
• Cut out on unnecessary luxuries – attempt cutting out at least one of your expenses for a month, such as your weekly takeaway or your morning coffee, and rather put that money towards your debt or savings.
•  Make money – look for ways to increase your income, even it’s as simples as offering your services as babysitter, house sitting or looking after someone’s pet.
• Alter your spending patterns – decipher what is consuming your savings and try and change it.
• Stay positive and focused –write a list of actions that you would take in order to fulfil your financial goals and dreams. Always remain focused and positive.

The quicker you pay off debt the faster you can improve your cash flow and the less you will need financial assistance from others.

Patel adds, “If you are cash strapped, try and pay off as much debt as possible by cutting expenses and redirecting cash to interest-bearing debt. It won’t happen overnight, but dedication to a plan will pay huge dividends in the long run.”

Final tip

“Financial independence is all about being in control of your money and not allowing money to manage you. It also means taking responsibility for your own finances and not relying on others to help you out every month. Money management begins with knowing where your money goes and managing it responsibly. It is important to live within your means, save for rainy days, manage your credit and repay monthly instalments,” says Ramosedi.

*Handy savings tip: If you are in debt, consider debt counselling. You can apply for debt counselling here through Justmoney: http://www.justmoney.co.za/debt/