6 Steps to Achieving Financial Freedom

by | Oct 3, 2023 | Life

Personal finance plays a critical role in shaping our desired lifestyle and has a profound impact on our emotional well-being. Unfortunately, South Africa faces a significant financial literacy challenge, with many people realising the importance of financial planning and money management only later in life. This lack of financial awareness contributes to the retirement crisis and high debt levels among the average citizens. In this article, we will outline six essential steps to help you secure long-term financial freedom.

1. Educate Yourself in Financial Matters

It’s surprising that our education system often neglects practical real-life skills, including financial literacy. Taking just 5-10 minutes a day to enhance your financial knowledge is crucial. Knowledge is power, and understanding how to manage money and plan for your financial future is paramount.

2. Live Within Your Means and Budget

Budgeting is the foundation of effective cash flow management. Regularly review your income and expenses, identifying and eliminating unnecessary costs. In a world filled with advertising and extravagant lifestyles, living within your means is crucial to avoiding debt. Calculate your Debt-to-Income Ratio (DTI) by dividing your total monthly debt payments by your gross monthly income. A DTI of 10-20% is excellent, while anything over 35% is excessive. Differentiate between “good debt,” such as a mortgage, and “bad debt,” like luxury cars or credit card balances. Pay close attention to interest rates and prioritise budgeting to minimise unnecessary debt.

READ MORE: Could EQ Be the Key to Unlocking Financial Success?

3. Invest, Don’t Just Save

Many people are unaware of financial concepts like inflation and investment options. Saving money in a bank account without achieving growth can lead to a loss of purchasing power over time. Develop a diversified wealth creation plan encompassing short, medium, and long-term investments. Diversification reduces risk. Aim to spend as much time in the market as possible, benefiting from compound interest. After establishing your budget, allocate a fixed monthly amount for long-term investments. Consult with a financial professional to determine suitable investment vehicles and portfolios. While it’s wise to maintain an emergency fund in an interest-bearing account, consider investing any surplus income in long-term portfolios featuring bonds, equities, and property.

4. Protect Your Wealth with Insurance

Insurance is often viewed as an unwelcome expense, but it’s vital for safeguarding your assets, health, and life. Imagine losing your income due to disability or illness—this could jeopardise your investment plan. Besides short-term asset insurance, secure basic hospital coverage, gap insurance, and life, disability, and illness insurance. These measures are critical for preserving your wealth and ensuring your financial success.

READ MORE: How to Embrace Your Fear Factor for Better Investments

5. Attend to Tax Affairs and Estate Planning

Paying taxes is a civic responsibility that cannot be ignored. Keep your tax affairs in order and up-to-date to avoid future administrative hassles. The South African Revenue Service (SARS) is rigorous in enforcing tax compliance. Additionally, estate planning is essential as your wealth grows. Regardless of your age or status, having a valid will in place is crucial. It can be a simple one-page document or a professionally drafted will kept in safekeeping.

6. Assemble Your Financial Team

To ensure a prosperous financial future, build your own “financial team” comprising qualified professionals. Include a trusted financial advisor, a tax consultant, and other necessary experts. Collaborating with professionals who understand your goals and dreams will make your financial journey smoother. If you find that your current financial professionals are not meeting your needs, don’t hesitate to seek out new ones.

Meet Pierre van der Merwe

Pierre Van der Merwe is an established financial advisor and co-founder of Precision Wealth, a dynamic financial services company which offers holistic financial planning services to both individuals and businesses with offerings both locally and offshore. Pierre is passionate about financial education and enabling South Africans to upskill themselves in financial wellness.

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