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Simple steps to achieve financial freedom

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Simon from Pretoria recently wrote to City Press to say that he was unemployed, but was expecting a cash-back payout of about R400 000 from an Avbob policy. ‘Where can I invest this money and how much should I invest until I am able to find employment again? I am currently 28 and would like to be financially free by the age of 35,’ he says. Neesa Moodley shows the way

The good news is that all is not lost and there are several options available to Simon. Tumi Mothoagae, a financial adviser at Liberty, says ideally Simon should save the entire R400 000.

“However, realistically, he is unemployed and should set aside some money to meet his living expenses for the next three months. This will give him a buffer during which he can look for a suitable job without incurring debt,” Mothoagae says.

Plan of action

Before Simon can consider how to achieve financial freedom, he needs to take steps to address the fact that he is unemployed but must still make ends meet. This is the plan of action Mothoagae outlined for him.

1. Apply for UIF. He could apply for Unemployment Insurance Fund (UIF) benefits. When you are employed, both you and your employer pay 1% of your salary each month towards UIF. You can claim unemployment benefits if you have been dismissed, retrenched or your contract has expired. It is important to note you cannot claim from UIF if you voluntarily resigned from your job.

2. Emergency fund. Simon’s situation illustrates the importance of having an emergency fund. He is fortunate that he has a windfall on the way.

“Often people with no emergency fund end up incurring debt simply to make ends meet. Ideally, you should have an emergency fund equivalent to three to six months’ living expenses and you should replenish your fund if you dip into it. The emergency doesn’t have to be as drastic as losing your job. For example, you might need to pay a R5 000 excess because you were involved in a car accident or might need to pay a rental deposit of R15 000.

3. Suitable savings vehicles. A lot will depend on how quickly Simon finds employment. He should be careful about locking the funds into a long-term investment until his job prospects are clear.

Simon could invest in a unit trust because he can make unlimited withdrawals at his discretion. A low-risk unit trust could provide interest income without affecting the capital.

Once Simon’s employment prospects improve, he could switch to a higher-growth unit trust suited for longer-term investments while keeping a portion in a money market fund to kick-start that important emergency fund. Simon could also take advantage of a tax-free savings vehicle, limited to R30 000 a year.

4. Cut back on the budget. Despite the fact that he is due an amount of R400 000, Simon needs to cut back on costs wherever he can. This is because he has no idea when he will find employment again.

“If he wants to achieve financial freedom in seven years, he needs to ensure he doesn’t burn through his windfall now,” Mothoagae warns.

There are several ways Simon could cut expenses:

. Adopt a healthier diet with less meat and alcohol to reduce his grocery bill.

. Cancel his gym membership in favour of walking the dog regularly or going for hikes.

. Make food from scratch. For example, if you bake your own bread, this can cost you as little as R70 a month compared with buying a loaf of bread regularly, which can cost as much as R120 a month or more.

. Reduce unnecessary expenses, such as the satellite TV subscription.

. Since Simon is aware he is going to receive an amount of R400 000, he could increase the excess amount on his short-term insurance for his household contents and car, thereby reducing the premium he has to pay each month. This is a good solution because it reduces his monthly costs and he can ring-fence the money required for the insurance excess.

. Simon can also use some of the lump sum to pay the short-term insurance premiums upfront. This could save him up to 15% in premiums and he also knows his insurance will not lapse while he is unemployed.

5. Contact creditors. You should never wait until your debt payments are in arrears to contact your creditors. The moment you know your financial circumstances have changed, you should contact your creditors to make appropriate arrangements. Some creditors, such as banks, are prepared to consider reduced payments for a minimum period. For example, you could reduce the amount payable on your home loan for up to six months. Be aware, however, that you will have to make up the shortfall when you are employed again.

Simon should also find out if he has credit life insurance on any of his debts, because this can pay up to six months of his debt repayments

Simple steps to be free

BUDGET
Draw up a budget listing expenses and income. Ideally, your expenses should never exceed your income.

You should aim to spend about 50% of your income on your needs. You will have to track your purchases to make sure that you stick to your budget.

PLANNING
You have to be proactive. This means setting a goal and then saving towards it. Any purchases will require a deposit. A financial planner can help you work out an investment timeline based on your goal and how much you can afford to save.

An independent financial planner can help you work out what your financial needs are and how best to achieve them.

You should have an annual review to ensure your plan is up to date and takes into account different life events or stages, such as marriage and having children.

Your financial plan must also take into account different savings goals, such as short-term, medium-term and long-term savings.

DEBT
You must tackle your debt one step at a time. Prioritise paying off the highest interest-bearing debt. Resist the temptation to take on new debt. If you keep chipping away without buying anything more, you will eventually be able to pay off your debt. If your debt is more than you can afford to repay, debt counselling may be an option.

The National Credit Regulator’s website has a list of registered counsellors you can use. The debt counsellor will negotiate a reduced repayment plan with your creditors, which will ensure you still have money each month to meet your living expenses.

However, once you are in debt counselling, you will not be able to access further credit until all debt is paid off.

INSURANCE
Different insurance products can help you plan for different events. For example, short-term insurance will help you if you are involved in an accident or your home is burgled. Life assurance will pay out to your beneficiaries if you die, or to you if you become disabled.

ESTATE
You can gain peace of mind by having a valid will drawn up by an attorney. This will ensure your family is provided for after your death and your assets are distributed as per your wishes. When you plan your estate, you should also take into account the taxes your estate will be liable for, such as capital gains tax, estate duty and any income tax owed before you died.

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