What does financial freedom mean in today’s world?

Last updated on 13th May, 2020 at 10:29 am

Many South Africans dream of being financially free. Financial freedom means having enough savings, investments and cash to afford a lifestyle that we want for ourselves and our family. Joanelle Smit, financial planner and director at Spectra Plan BlueStar, says this is all achieved through passive profit. “Passive profit is what you have after your fixed expenses have been paid. It means you still have enough money to live comfortably.”

But how do you achieve financial freedom?

1. You don’t have to clear all your debt

Many people believe that in order to be financially free they have to get rid of all their debt. Not so, says Smit: “I believe having good debt is fine. No debt really doesn’t mean financial freedom. Having good debt can help you gain financial freedom. If you have two properties, each with R500 000 owed on them, a way to financial freedom could be forged if you rent them out and use the rental income to pay the bank and reduce your debt. It’s all about how you structure it.”

Read more about good debt vs. bad debt, here.

2. Don’t cash in your pension

If you are retrenched or moving to another job, the temptation to cash in your company pension instead of transferring it to a preservation fund or similar vehicle is too much for most. But this is a big mistake.

Smit says: “Many believe that if they cash out their pension funds to pay off their debt then they will be financially free. But what they’ve done is cancelled out their future retirement income instead.”

3. Do find different ways to invest your savings

Some savers make the mistake of only investing in one type of savings product. But this is risky. “What’s key is to have different income streams that will help in achieving financial freedom. You need a pension fund, retirement annuity, investments and property. You can’t get financial freedom from just one form of income,” says Smit.

Click here to learn how to manage your savings and investment risk through diversity.

4. Do label your savings pots

Smit warns that if you don’t label your various savings pots there’s a greater temptation to dip into them. “If savers have a name for an account aligned with its purpose then they are more disciplined to save. For example, it’s a lot harder to withdraw from ‘Johann’s savings for tertiary education’ than simply a pot you’ve named ‘savings’.”

5. Do stick to your plans

It can be tricky to stick to your financial plans when it’s so easy to get a bigger car, house or go on holiday. But Smit warns this is how many people end up with nothing in retirement. “People don’t stick to original plans. They either cancel or withdraw from their unit trust and then are mad at the end as they don’t have enough for pension.”

Here’s how to set up a savings goal. Remember, use our free savings calculator tool to help you plot out your goals, and set up a plan to achieve them, here.

6. Don’t live above your means

Smit adds that one of the biggest risks to financial freedom is that people live beyond their means. “If you don’t have children then you don’t need a R2 million house. Many do this though because the bank lets them borrow up to that amount. But that’s not financially wise and won’t make you financially free. You can pay a R1 million house off quicker and that can help you with generating an income later. Once it’s paid off you can use the money you gain to buy another house or invest in a business. I’m a big believer that you should pay something off as soon as possible – but never use your pension for that.”

Explore how you can take control of your financial freedom by talking to an expert in financial planning. Book a meeting with a financial planner here.