What are the five foundations of financial success?
Desiring economic strength but feeling discontented with where you are is the lived experience of most people in South Africa. In a recent survey by the Lending club, only 34% of participants said they felt that their personal finances were healthy. Thus, a significant portion of the population requires guidance and assistance when it comes to their finances. What is the best way to get to the point where we're all empowered with money? Being responsible with your daily purchasing habits and thinking long term is the key to building a solid financial foundation that continues to take care of you now and supports your future goals is a great way to start.
First Foundation: Save Up and Protect Yourself
The first step is to save and make sure you’re protected against life’s costly eventualities. Setting up an emergency fund, insurance, and estate planning are the three key factors to consider for this.
Emergency Fund: Setting aside an emergency fund to cover unexpected events is one of the most important aspects of any financial wellness journey. Backup savings come in handy for all sorts of disturbances in life. Putting money in a high-yield savings account can help you pay for unexpected expenses, such as medical bills, or weather unexpected events like losing your job.
Insurance: Much like savings, but with a whole lot more benefits, insurance also allows you to prepare for anything that may unexpectedly happen in the future. This includes damages to your possessions like your house and your car, sickness, hospitalization, disabilities retirement, and even death. Insurance offers you fool-proof protection for you and your loved ones. So, make sure you are protected by getting the right cover on all your insurance needs. Even if you have coverage in place, you’ll want to review them as your lifestyle or family makeup may have changed since you purchased the insurance. You may be able to find a cheaper policy.
Estate planning: In line with putting in place necessary protections, create or update your estate plan to help you control what happens to your assets and children when you pass away. There are numerous benefits to having an updated will, including having the ability to choose godparents for your children, keeping a helpful record of your possessions that surviving relatives might not know of, and laying out the details of important decisions regarding medical care should you be unable to express these at a later stage.
Second Foundation: Get Out of Debt
Next, it’s time to start working on reducing your debt. From taking out a mortgage to car loans, student loans, credit cards, and medical bills, debt can spiral out of control very quickly. Before you know it, you can be overindebted and unable to meet your monthly financial obligations. However, it is very possible to turn things around no matter how far down the spiral you have sunk. The first step is to stop taking on more credit, and then from there you can work on reducing your debt to a manageable level until you can actually eliminate it completely. Here are some strategies that you can try to successfully cut down your debt.
The snowball method: Like a rolling snowball across the ground, the debt snowball method can help you build momentum as you start repaying creditors by paying off debts from smallest to largest. While you’re at it, also make sure to pay minimums on all other bills while sending extra cash to the debt with the smallest balance until it’s paid in full, and then move on to the next smallest debt. Getting rid of these balances will allow you to free up money for other debts. As a bonus, seeing progress keeps you motivated and on track to repay your debts.
The avalanche method: The second option, the debt avalanche strategy, uses a similar tactic but as an alternative, arranges debts by interest rate. With this approach, you focus on paying off the highest-interest debt first while making minimum payments on all the other debt. As a result, it will lower your interest rate, allowing you to pay off other debts at a faster rate.
Third Foundation: Pay Cash for Your Car
Third on our list is to buy a second-hand car instead of a new one and pay for it with cash. In several ways, buying a used car is more economical than buying a new one. While it's true that used cars cost less simply because of their sticker prices, that's not the only saving you will be making. Fees, insurance, and vehicle depreciation will also be significantly lower than in a brand-new vehicle. Interest is charged on the loan amount when you finance a vehicle. As part of the new finance agreement, there are also initiation and monthly fees. By paying cash up front, you can avoid all of these problems. No interest, no initiation fees, just you and your car.
Fourth Foundation: Pay Cash for College
In line with our previous notion, using cash to pay for your studies is a great way to stay financially free. We know it sounds impossible, but it does not matter what your financial background is, you do not have to take out student loans to get a tertiary education. There are several saving and investment options that parents can take out to ensure that they have enough money saved up for when their tertiary education. These are usually taken up from their children’s young age, to ensure that by the time the child is ready for college there are enough funds in the account to cover their entire tuition. However, if this did not happen for you and you find that traditional universities are out of your financial reach, you can still study through cheaper options like private colleges or TVET colleges. Doing these can help you avoid the thousands of rands of debt that most students graduate with and start adulting on the right foot!
Fifth foundation: Build wealth and give
Attaining wealth — at least for people who are not born into it — is much more personal than building millionaire habits or investing wisely. For people who do not come from it, attaining wealth requires specific psychological, physical, and financial measure to turn things around.
The first step is to let go of your limiting beliefs. Those who have grown up without money or the resources to make enough of it may believe wealth is reserved for a select few. The only way to overcome this mindset is to consciously pay attention to your thoughts and then choose to entertain other ideas instead. Also, don't let fear keep you from pursuing wealth or a pay cheque that supports you and your goals. Finally, do not limit yourself to a high income. In order to build wealth, you need to be intentional about managing your finances and look into some investment options.
Conclusion
The true definition of financial success is achieving your monetary goals, whatever these might look like. Some people strive to become millionaires, while others are content with enough money to avoid economic hardship. Whatever your goals, your desires, or what you want for your finances, the five foundations to financial success apply to everyone.
