Imagine a life where you control your finances instead of being controlled by them. Financial freedom is the result of handling your money well – it requires hard work, sacrifice and time, but the effort is worth it.
Are you ready to learn how to build a life of financial independence for you and your family? This guide contains 12 tips to help you to achieve financial freedom:
1. Create a financial freedom vision board
Ensure you remain motivated to achieve your goals by creating a vision board that you can work towards.
A financial vision board is a useful tool to help you clarify, concentrate and maintain focus on your goals. It is simply a collection of images, words, numbers and dates around a specific goal. Seeing this board every day will help you to stay focused when the end seems nowhere in sight.
This visual stimulation will keep you motivated to adopt healthier money habits, helping you to stay on track and to achieve milestones.
2. Set specific concrete goals
It’s no fun saving if you don’t know what you’re saving for. Give yourself a savings goal – such as a deposit for a home or car, education, retirement or luxuries When deciding on a goal, consider how much you want to save, how much debt you want to pay off, and by when. Concrete dates and amounts will help to motivate you.
3. Recite a spending mantra
Create a spending mantra unique to yourself that can help you resist impulse buys as well as instant gratification purchases. Here are a few examples of spending mantras:
- Save before you spend: This is based on investment guru and multi-billionaire Warren Buffett’s savings equation which is Income - Savings = Expenses. Essentially, he’s saying that before you spend any money, save it. You can get this right with a debit order that goes off on the day you get your salary.
- Wait before you splurge: When you want to buy something expensive but not essential, use the 30-day rule. Postpone the purchase and if after 30 days you still want it, then go ahead. On the other hand, if the item really isn’t essential, you’ll be better able to resist the urge to spend your hard-earned money.
- Charge yourself a luxury tax: Every time you indulge in some excess spending, put away an equal amount into your savings. For example, if dinner and a movie with your family cost R2 000, then put R2 000 into your savings as well.
4. Respect yourself
By taking care of your financial position, you’re respecting yourself and your wellbeing. It’s stressful to see the debt you owe and to watch the interest climbing.
Money worries are often cited as one of the greatest causes of stress. Consider what that can do to your health over time. Rather spend some time sifting through your expenses and plan a budget you feel you’ll be able to realistically stick to.
5. Reward yourself
Don’t forget to treat yourself when you reach a savings milestone. This will help motivate you to keep putting any extra cash away when you can. In addition to focusing on the big goals, aim to also set smaller, short-term goals as these will reap quicker results and keep you motivated. For example, saving money each week for a trip in six months’ time will keep you inspired to put the money away.
6. Create a budget
A budget can help you accurately manage your money. By creating a budget, you can see exactly how much money is coming in and out of your accounts, how much debt you have and how you can make strides to reduce that debt. For many, figuring out how to live on a budget can be a steep learning curve. A budget isn’t meant to stifle your life and cause you to live like a hermit, but it does mean taking control of your finances.
A budget helps you to see that you’re spending R500 a month on takeaway coffee, and R100 a month on a television subscription you aren’t even using. With that awareness in mind, you can optimise how you spend your salary every month, and start to steadily grow your savings.
7. Use ‘plastic money’ with care
Credit and debit cards have become essential, especially when you take into account the increasing amount of online transactions. On the other hand, the average person spends more per transaction when using plastic.
"When you vary the payment method, people are willing to pay more," said Duncan Simester, a professor of marketing at MIT who published a landmark paper on the subject in 2001. "You’re not forking over a dollar bill, so there is less sensation of loss."
Richard Feinberg of Purdue University, who studied the spending habits of students in the restaurants surrounding campus, shares a similar finding: "Paying $5 for a coffee might seem like a lot if you only have $10 in your wallet. But if your credit card has a $10 000 limit on it, it doesn’t seem like much."
Paying with cash will make you think twice about making any purchases.
8. Spend a minute a day on your finances
Alexa von Tobel, founder and CEO of LearnVest, sets aside a minute every day to scrutinise her financial transactions. She says that this 60-second act helps her to identify challenges immediately, while keeping track of how her financial goals are progressing. Doing this also sets the spending tone for the rest of your day.
Your minute allows you to keep track of your everyday expenses, and to see where your money went the day before. This makes it easier to stick to your budget, as you are monitoring transactions as they happen, instead of at the end of the month when your budget didn’t work out and it’s too late to make any changes.
9. 20% of your income should go towards financial priorities
20% of your salary should go towards long-term savings, such as increasing your emergency fund, paying off debt or increasing your retirement contribution.
Sticking with 20% also allows you to allocate a solid number to your long-term savings instead of changing the amount monthly, or not allocating anything to it at all.
10. 30% of your income should be for entertainment
Just because you’re living on a budget doesn’t mean you can’t enjoy yourself. Lifestyle and entertainment expenses include things like movies, subscription services, and restaurants.
Setting aside 30% of your salary for fun offers you the opportunity to save monthly, while still participating in activities you enjoy. By balancing your savings and your entertainment budget, you also help to keep yourself motivated to continue putting money away.
11. Calculate your net worth
Your net worth is the difference between your assets and your debt. This is the big picture number that can tell you where you stand financially.
"It represents the sum total of your entire financial life, reduced to a few numbers. It shows you all of the assets you've accumulated over your lifetime. It shows you all of your current debts."
"The difference between the two is your net worth," says Rob Berger, investor, lawyer and Forbes contributor. By studying your net worth you can track the progress you’re making towards your financial goals. On the other hand, it can also tell you if you’re spending instead of saving.
12. Leverage financial tools
Keep your savings in a separate account that offers a competitive interest rate. Don’t use this account to payments or for debit orders. This will help to curb unintentional spending of your savings.
- Money Market accounts and Flexi Advantage accounts generally provide you with a premium interest rate.
- A Tax-Free savings account allows you to save up to R36 000 each year, and R500 000 in your lifetime – without having to pay tax on the interest earned.
Pay your expenses first when you receive your salary. This will give you a good indication of what’s left over for your day-to-day expenses and for putting away. Opting for a debit order that goes off soon after pay-day takes the hassle out of having to make recurring payments each month, or worse, forgetting to pay an important expense.
Everyone can start saving somewhere, even if all you can spare is a small amount. All it takes is discipline, which you can foster with concrete monthly goals, a money mantra and a solid budget.
Put something away every month and save more when you can – your future self will thank you for it.
