You need to earn a lot to be well-off, right? Not so, says John Manyike, head of financial education at Old Mutual.
Manyike said that wealth is as much about controlling debt and spending as it is about income.
“It sounds counter-intuitive, but if you earn a moderate salary and are free of short-term debt, you’re probably in a better financial position than someone who earns a lot of money but spends it on serving short-term debt,” he said.
Sadly, people who are completely debt-free make up a very small percentage of working South Africans, Manyike noted.
“With increased interest rates, higher fuel and food costs and no immediate respite in sight, South Africans are feeling the pinch, now more than ever. Often during tough times the temptation can be for people to get into debt, like making day-to-day purchases on credit, but it’s at times like these that minimising your debt should be your priority.”
The first step towards a debt-free future is to understand the importance of managing your personal finances. Break bad old habits that get in the way of financial stability and establish new, healthier money habits.
Manyike offers five basic actions to implement right now to start a better debt-free life:
- Review your debts and make a conscious decision to pay off the most expensive debt first. This is not necessarily the largest amount outstanding but rather the accounts that charge the highest interest rates, such as high interest-bearing credit cards and store cards. Consolidating all your debts with one single loan that pays off all your debts is another possible option to clear your counters.
- Avoid accumulating more debt: pay for your purchases with a debit card or cash, rather than a credit card. Discipline is key.
- If you receive an annual bonus or any other unexpected windfall, contribute part of this towards reducing your home loan or car finance, as this will reduce the amount of interest you pay overall on these longer term loans.
- Set aside a portion of your bonus for investment over the long term, like a tax-deductible retirement annuity or an endowment fund. Also make sure you consider the various tax-free savings options that offer you your full investment return without being taxed on any of the growth you have earned.
- List your unavoidable commitments in 2016: school fees, medical bills, inflation-adjusted insurance premiums, car services – and ensure you set aside enough to handle those expenses without financial pain.
Lastly, charging down your debts by paying more than your required monthly instalment can help you save on interest levied against your credit facility or retail account. This ensures that you are adequately equipped for possible tough economic times ahead.
“It is better to assess and discuss your impending difficulties than to ignore the problem or wait for creditors to call you wanting to know when you are going to pay back their money,” said Manyike.
This article can be found on Old Mutual