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EDINBURGH — Personal finance advice is common sense, yet so many salary earners are burdened by money woes. In this article, Johannesburg-based financial planner Dawn Ridler sets out some basic steps to get the journey started to financial freedom. You don’t have to be rich to unshackle from money problems; live within your means by trimming debt, keeping your ego in check and making sure you don’t fall for misleading financial services marketing schemes. If you are really serious about getting on top of your money problems, consider studying to become a financial planner yourself, she advises. – Jackie Cameron
By Dawn Ridler*
The latest advertising buzzword and tag line you’re hearing from large Financial Services Providers is ‘Financial Freedom’ – in their case it usually means either taking out loads of credit so you can ‘live your dream’, aka living beyond your means, or investing with them on their mediocre high-fee platforms. What is true financial freedom?
No more debt
If you have debt your assets are under threat from the vagaries of the economy, your job and rising interest rates. Some debt, of course, is almost unavoidable; mortgage bonds for example. This is also the ‘cheapest’ debt, unless of course car sales are down and inventories building, in which case those manufacturers will often lure you in with ultra-low interest rates – on new cars only of course (which devalue 25% the second you drive them off the forecourt).
If you default on your mortgage you’re going to be royally scr*wed by the bank, whose only interest is getting back the value of their loan. Before you take out a loan, think through a couple of ‘what ifs’:
- What if interest rates go up 25%?
- What if one of us can’t work?
- What if I, or my spouse, lose my job?
- What if my business fails?
A house is not an ‘investment’ in the traditional sense – it does two things – caps the ‘rent’ you pay which will rise and fall at the interest rate level not at 10% per annum. Secondly it ‘replaces’ the need to pay rent in your retirement years. In effect, it is part of your retirement plan. If you really want this ‘investment’ to work, buy once and live in it forever. If you absolutely must move, sell the house yourself, it really is not rocket science and you’ll save tens, if not hundreds of thousands in commission. Your investment is still going to be nastily eroded by transfer duty though so do the math before you move just because you’re bored or trying to make a ‘good impression’. If you look like you might get underwater on your bond, get ahead of the curve and sell before the bank gets hold of it.
Nest egg: have cash
One of the best ways to be financially free is to insulate yourself from the ups and downs of the economy and life by having ‘liquidity’. An emergency fund of at least 3 months family expenses is just the bare minimum. Until your retirement pot is full, you may need to take out some life/disability cover to create liquidity for your family in case you die or are disabled prematurely.
Don’t go overboard on the ‘Life insurance’ to leave a legacy for your kids, that premium would be far better spent in investment, and leave them a legacy from investments, not life insurance. Don’t mix investment and life insurance (your premiums back if you don’t claim nonsense).
If you’re married, make sure that both spouses have liquidity available, this also makes sense from a tax perspective.
Cut back on consumption
This is the most unpopular and often the most difficult way to create long-term financial freedom. To do it properly requires personal and family self-discipline – every day for years. There is always the tussle between the feeling that you deserve a reward for your hard work and the necessity of not frittering hard-earned income away.
It is usually the big purchases – house, cars, holiday homes that are difficult and expensive to unwind. If you’re not coming right on your income, have a long hard look at your bank and credit card statements and find out where the hotspots are. If day-to-day expenses are out of control, have a cash kitty, split by week and only use that until you’re used to the appropriate level of spend.
More than one stream of income
Both spouses working is almost the norm these days, and certainly if the family finances are struggling, it is an absolute must. With the gig economy becoming more and more accessible, if your day job is unstable, or just not enough have a look at creating extra income in your spare time.
I am putting the finishing touches on a blog on which gig incomes make sense and which don’t and that will be on my website shortly. Leveraging just your time, or an asset (Uber or Airbnb for example) is all very well, but they are finite. Following your passion is all well and good, but is usually best left as a hobby or you’ll end up a passionate pauper (ever heard the term starving artist?)
Always save and invest
When times are tough, it is such a temptation to stop saving and investing, especially when it comes to little windfalls or bonuses. You should put at least half of the bonus etc into investment – the bond is not an investment (far too easy to dip into).
Both spouses need to have their own retirement savings, and you need to know how much you should be putting in there monthly (not just what is allowed as a tax deduction). Pay attention to the fees that might be eroding your investments, and never enter an investment that has penalties if you stop (most insurance companies). Don’t cash in pensions when you leave a company – you’ll probably never catch up and SARS takes a huge chunk. If you must dip into the emergency fund, then topping it back up should be a priority.
As tempting as it is to DIY, when it comes to long-term investments I strongly recommend a professional planner/advisor – not just because I am one. While it might be possible for a financial planner to sort out a mess down the line you will never get that time back and they cannot work miracles. It is the market that gives you the returns over time, and that depends on the asset allocation. Don’t play day trader with your biggest asset at the end of your working life. If you want to play the market do it with your entertainment money.
The right mindset
I know this is going to sound all touchy-feely coming from a financial planner, but a combination of a sound work ethic with a sensible consumption ethic will often make the difference between long-term poverty and wealth. This is hard, you must keep at it for days, months, years and decades – and you’re basically on your own. There is no quick fix, and if you’re in a relationship with a big spender, it is going to be doubly difficult.
Coaches can help you get on the right track but because this is a decade’s long project, you will have to do the heavy lifting. If you are over-consuming, put as much of your income every month out of your reach – 6 month fixed deposits for example, at a different bank, where you don’t have online access (you get a good rate from Capitec). Your investment advisors can give you more suggestions. Care less about what people think about you, keeping up with the Joneses is a wealth-killer. Invest in your and your children’s education, and make sure that your Millennial’s Gap Year doesn’t turn into a Gap Life.
Action: Winning Financial Freedom is a long journey, and costly mistakes are difficult to unwind – and you never get the time back. This is not a bathroom DIY project. Get ongoing professional advice, or become a professional.
- Dawn Ridler, founder of Kerenga Wealth Ecology. CFP® BSc Hons, MBA
She grew up on the tea estates of Africa from Kenya to Rwanda, Burundi and Madagascar. It was those years of playing in the equatorial rain forests of Africa that ignited her first love of ecology, specifically botany and entomology. After graduating with a BSc Honours in Plant Physiology at 19 (with the SAB gold medal in her back pocket) she decided that the business world held more challenges (and greater financial stability).Dawn completed her MBA at age 22 and was let loose on the unsuspecting business world. Most of her career has been in marketing and retail. After a stint as CEO of Crafters Market and Build-A-Bear Workshop (SA) she decided to leave the retail arena and moved into financial services.
She achieved her Certified Financial Planner® designation in January 2010 and following 4 years at Sasfin bank she went out on her own and Kerenga is the result. Dawn is a registered representative on the FSB license of Hexon Financial Services number 42793. She is currently a member of Financial Planning Institute’s Risk competency committee. In addition to the blogs on this website, Dawn blogs extensively on LinkedIn and is a BizNews ‘Thought Leader’. From time-to-time she also makes a guest appearance on CNBCA. Last year she published her first novel, and more are in the pipeline. Dawn has always been passionate about innovation and technology and is on the adjudication panel of both the Technology Top 100 awards and Accenture Innovation Index. See Dawn Ridler.
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