Debt is all the same, in the sense that we borrow money now and pay it off later. What sets good debt apart from bad debt are the positive or negative consequences that arise from the particular type of debt that is taken out.
18 September 2013
Poor financial planning skills and the lack of financial advice has left many South African consumers in poor financial standing, whereby they are ridden with debt and are struggling meet the interest payments on their debt, let alone payoff the debt itself. Indebted consumers are also failing to address the negative impact their ‘living for today’ lifestyle has on their future financial health and are living from payday to payday, lacking disposable income and savings.
Everyone has a unique financial situation and is faced with various financial difficulties, however each individual should have the same financial goal to work towards – generating enough funds over their lifetime, to make sure that their investments one day provides them with financial freedom.
Financial freedom occurs when the income from your assets exceeds your expenses and as a result, you no longer have work to generate an income to cover your expenses. DebtBusters believes all South African consumers should aim to achieve a bright financial future and propose adhering to the following steps and taking the right action to accomplish financial independence and freedom.
1. Do not accumulate ‘bad’ debt
The most crucial step towards financial freedom is to become debt free. Debt is considered as ‘bad’ when you use credit to purchase items, which will be consumed, will not generate an income and will not appreciate in value over time. Bad debt usually has high interest rates attached to it and the debt repayment terms are often not negotiable. It also prevents consumers from becoming financially independent and can be extremely detrimental to your financial situation.
South African consumers struggle to stay debt free due to their bad financial habits, such as failing to differentiate between what they ‘need’ and what they ‘want’, consequently spending recklessly, as well as spending more instead of saving when their salary increases.
DebtBusters advises South African consumers to be conservative with the debt they accrue and to only consume ‘good’ debt when they are able to afford to meet the repayments. Debt is considered as ‘good’, when it has the potential to increase in value, higher than the rate of inflation, or will generate an income in return. An example of good debt would be borrowing money from the bank to start a business or purchase a commercial property. Good debt can assist you with achieving the financial freedom you deserve.
If you are struggling to eradicate your debt, DebtBusters debt counselling services can assist you by reducing your monthly debt instalments. DebtBusters will negotiate with your credit providers to reduce interest rates and extend the debt repayment terms, thus saving you money.
2. Build an emergency fund
Another important step, which will contribute towards achieving your goal of financial freedom, is creating a cash safety net. Emergencies can have serious implications on your financial circumstances and thus, DebtBusters advises you to build an emergency savings fund, which can be used for emergencies only.
An emergency savings fund should be held in an interest bearing account that is easily accessible to meet unexpected expenses, which may arise. It is best to completely separate an emergency savings fund from your normal savings account and it should hold three to six months’ salary.
An emergency savings fund is vital for a successful savings plan, as it will prevent you from accruing debt or having to tap into your savings account, which will most likely be allocated for other requirements, such as your child’s university funds or retirement. Should you need funding urgently, an emergency savings account should also save you from having to sell your investments. The situation could also be aggravated by the fact that you may not get the best return on investment if you are selling during a bad economic time.
3. Spend less than you earn and make saving a priority
Saving and spending less are vital components of your plan to achieve financial freedom and it is advised that you start saving from as early as possible. Start by saving small increments and as your income increases, up the amount you save. Optimally, save at least 15% of your total annual salary or income.
Get into the habit of saving and spending less, by always paying yourself first every month and setting a savings goal to work towards, which will motivate you to spend less and prevent you from spending recklessly. As you achieve your smaller goals, replace them other small achievable goals, to contribute towards reaching your ultimate goal of financial freedom.
Take advantage of retirement plans at work, alternatively set up your own retirement fund. The earlier you start saving for retirement, the longer amount of time you will have for your money to compound or grow. Match what your employer contributes towards your retirement fund on a monthly basis in order to double your retirement savings. Avoid the temptation of accessing your retirement fund, if possible.
4. Build your income generating assets.
With the assistance of a professional financial advisor or by educating yourself on investments, investment risks, your risk tolerance, expenses and the importance of diversifying your investments, implement an investment strategy to build up your income generating assets. This is the final stepping stone to achieving financial freedom. However, before purchasing assets, which will pay for your expenses in the future and help you achieve your ultimate goal, you need to follow through on steps one, two and three.