Whether you’re just starting your professional life or if you’re nearing retirement, knowing how to manage your money effectively is essential.
Should you have a savings account or a retirement plan? How do you build wealth for both the short term and long term? Below are 10 key considerations to guide you on your financial planning journey towards financial freedom.
1. Change your mindset about money
Look at what you currently think and believe about money. Do you believe it’s hard to come by? Do you believe that “money doesn’t grow on trees”. This could be affecting how you engage with money.
If you want to get your money working for you, you have to reflect on what your beliefs about money are.
If you find yourself having a scarcity mindset, think about how you can change this to an abundance mindset.
For example, instead of thinking “Money is hard to come by” change it to something like, “There’s an abundance of money out there. I just have to figure out how to get it”.
2. Take inventory of your finances
You can’t do anything without first having an honest look at what you’re working with. Taking inventory of your finances involves listing all your sources of income as well as tracking all your expenses and debt.
Moku tip: Use your last three months bank statements to see where all your money is going. You might be surprised what you’re spending your money on.
3. Create a budget
“A budget is telling money what to do instead of wondering where it went” - John C. Maxwell
Instead of seeing a budget as restrictive, see it as the framework that will help guide you to financial freedom.
A budget increases your chances of covering all your expenses and allows you to prioritise what needs to be paid versus what you want to purchase. This means you have a greater chance of not missing payments and actually making it to the end of the month.
A budget is also essential for saving towards big financial goals.
Read: How to start a budget in 6 simple steps. In this blog post you will also get access to a free downloadable budget template to help you kick-start your journey towards financial freedom!
4. Pay yourself first with the aim of creating an emergency savings fund
According to research conducted by FNB, more than 80% of middle-income customers (clients earning between R15 000 and R42 000 per month) have limited or no savings that they can access within 7 days should an emergency arise.
This data shows us that many South Africans are not financially prepared to deal with an emergency.
By not saving towards an emergency savings fund, you are leaving yourself vulnerable for when emergencies do arise. Emergencies can include a geyser that bursts, car brake pads that need to be replaced, excess for an emergency medical procedure etc. Life’s emergencies will happen, to ensure you don’t put yourself into debt, you should build up an emergency fund that is worth at least three months of your salary.
Before paying any of your expenses and debt, put aside an amount of money to pay yourself first for this emergency fund. While ratios about how you can spend your salary can be effective, this is just one way you can spend your salary. Instead of focusing too much on the ratio and how much you should be saving & spending, focus instead on creating a habit of paying yourself first.
You can start saving with Meerkat’s savings solution. Start saving from as little as R25 per month, pay no account fees AND access your money whenever you like, without any of the red-tape.
5. Only buy what you can afford
Sometimes using credit is essential. In the case of purchasing a home or car, for example. However, purchasing the latest phone or watch is not essential, and often, not a wise use of credit.
If you can’t afford to buy a non-essential item, don’t use credit to buy it.
Remember, when you purchase something on credit, and you pay only the minimum balance each month, you will be charged interest on the outstanding balance. This means you can end up paying a lot more for the item than what it was originally priced at.
If there is a big-ticket item you would really like, start saving towards it. It will take longer to acquire it, but perhaps at that point you may realise you don’t even want it.
6. Reduce your reliance on debt
The dreaded ‘d’ word. Debt is such a slippery slope. Before you know it, you can be in over-your-head. To free up cash flow and have your money working for you, you should look at how you can reduce your reliance on debt.
One way to reduce your reliance on debt is to pay more than the minimum amount each month. By doing this you can significantly reduce the time and amount you are paying for your debt.
Moku tip: Pay your credit card debt in full each month so that you don't pay interest on the outstanding amount.
Read: 5 Ways you can pay off your debt fast in South Africa
7. “Saving protects your wealth. Investing grows your wealth” - Jaspreet Singh
If you’re looking to become financially free, you have to do both. In terms of priorities, you should look at saving first. The reason is that you need easy accessible cash for when emergencies arise.
Once you have built up your emergency savings fund, you can look at how you can start investing. Easy Equities is a South African investing platform that may be useful if you’re just starting out.
8. Invest in your financial education
Investing in your financial education can greatly increase your return because “when you know better, you do better”. Becoming more financially savvy does not have to cost you. There are plenty of free resources available out there. We recently went live on TikTok. Give us a follow and we'll help you do MORE with your money.
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9. Use the 50/30/20 rule when you get your salary
- Use 50% of your salary towards your bond or rent, groceries, transportation etc. This should be for all your fixed expenses.
- Use 30% of your salary towards the things you enjoy spending money on. Here you can think about what you usually spend your time on over the weekend. Is it going to restaurants, ordering in etc?
- 20% of your salary should be going towards your debt and savings.
Read: How to save money from your salary
10. Let compound interest work for you
Compound interest has been referred to as the eighth wonder of the world.
Interest can fall into two groups:
Simple interest and compound interest.
When you save your money, you usually get awarded interest for saving your money. This interest is a percentage and is usually worked out annually based on the amount of money you have in your account.
Simple interest refers to just the interest rate on your principal amount (amount you have deposited/ saved).
Simple interest example:
If you save R1000 a year at an interest rate of 2% per year, it will grow to R1020 by the end of the year.
Compound interest, on the other hand, refers to earning money on the principal amount (amount you’ve deposited) AND on the interest you’ve earned.
Compound interest example:
If you invested that same R1000 at a 2% interest rate, compounded monthly, you would have: R1020,18 after the first year. This means that your money can grow at an accelerated rate.