Janet Hugo
LET’S be honest, we all desire financial freedom. Who doesn’t dream of retiring early, travelling the world and knowing one’s loved ones are taken care of?

Fortunately, financial freedom is within everyone’s grasp. Follow these six steps to earn yours:

1. Start early

The only sure-fire way to make a success of investing is to give yourself plenty of “time in the market” so the earlier you start, the better. It’s commonly accepted that you should invest at least 15% of your salary from the very start of your career to earn financial independence in retirement. In South Africa, you can get a tax deduction of up to 27.5% of your earnings when you invest in a retirement fund, such as a retirement annuity. If you hit this mark, the odds are good that you’ll achieve financial freedom.

You may think that this will restrict your lifestyle and even make saving for a home or paying off a car tricky. But be assured that many genuinely wealthy people developed a habit of living well below their means before rising to affluence. Why not accept that minimalism is the new black, that you don’t need a large home, and that smart cars are a thing of the past? Globally, we’re moving towards an era of shared assets, such as using house swops for holidays and public transport to get to work.

2. Ensure correct asset allocation and diversification

People who earn financial independence base their investment decisions on correct asset allocation. They know that the various asset classes, including equity, property (private and commercial), bonds and cash instruments, each bear varying degrees of risk and are suited to different investment time frames. Equity and property are riskier and suited to long-term investments, while bonds and cash carry less risk and are suitable for shorter time frames. Successful investors are also all too aware of the need for diversification which means owning investments in different asset classes which each behave differently during the market ups and down.

Diversification includes investing in various geographic locations as well as in different asset classes. Diversification minimises risk and smooths out returns.

3. Rebalance

Rebalancing your investments (the process of readjusting the overall asset allocation in your portfolio to maintain your objectives) is also vital in achieving financial freedom. In practice, this often means selling some over-performing assets and buying more of those which have under-performed. Although this may seem counter-productive, it’s a proven investment philosophy that works as it locks in your gains.

4. Respect time

Successful investors aren’t gamblers and don’t entertain illusions of being able to “time the market” (that is, buying in before prices rise and getting out before prices fall). Even financial analysts and fund managers are unable to accurately predict these market shifts because no two business cycles are the same.

Also, smart investors allow themselves “time in the market” to earn financial freedom. Many people struggle with a “herding investment bias”, which results in selling during a bear market and buying when the market is bullish. Investors need to accept that there will be stressful times when the markets fall, but they always make a comeback eventually.

5. Use debt wisely

Wealthy people use debt very prudently. They use only one credit card to pay for disposable items such as food and clothes, pay off the balance monthly and make use of loyalty programmes. They understand that while compound interest works well for you from an investing point of view, it works hard against you when you don’t pay off your credit card as the cost of the interest is continually added to the outstanding capital, and you end up paying interest on an ever-growing pile of debt.

Successful investors also never use credit to pay off assets that depreciate in value. They don’t pay off cars using personal loans with high-interest rates, but they do use mortgages with low-interest rates to pay for property.

Wealthy people use debt to leverage business growth based on calculated risk. They do their homework, seek professional advice, and do the cash-flow projections to ensure that the benefits will outweigh the risk and the cost of the debt.

6. Automate saving and investing

Another habit that the wealthy rely on is automated saving and investing. They know that monthly contributions towards “safe” investments such as money market trusts will provide for emergency expenses such as unexpected dentistry bills not covered by their medical scheme. They accept that emergencies will always arise. The wealthy also automate their investing to benefit from the wealth-building strategy of rand cost averaging. When investing a fixed amount on a regular basis, one buys more units (of shares or unit trusts) when prices are low and fewer when prices are high. By doing this over a long period, you get a reduced average cost per unit over time. By automating your investing you minimise the risk of losing capital if you invest in lump sums and the market falls.

Embrace wellness on all fronts

If you aren’t already taking all six steps towards financial freedom, speak to your adviser now about getting all your ducks in a row. Once your financial freedom is taken care of, you can move on to ensuring you’re in a position to enjoy it. Look after yourself physically, invest time in continuous education and work on maintaining the relationships that matter to you.

Janet Hugo is a director of Sterling Private Wealth. A Certified Financial Planner, she’s a member of the Financial Planning Institute and is its 2018/19 Financial Planner of the Year.

PERSONAL FINANCE