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The South African’s guide to financial independence

The apartheid brought dark times over South Africa and most of its people, but the saddest part is that, even now, two decades after it was declared over, people are still suffering. The limitations and the racial segregation featured during the apartheid are still present in South African societies and the high level of corruption in the political world is making things worse.  

The access to education is hindered and over 50% of the population is living in poverty and poor conditions because they can’t get decent jobs. The unemployment rate is very high because a large majority of the population is not trained for anything that will fit the modern world. And, according to the Poverty Trends in South Africa report, over 30 million South Africans live in poverty (this represents 55.5% of the population). The sad part – most of them are black and lacking education – victims of the practices that were featured during the apartheid.

The government is trying to bring the country towards economic growth, but the measures put in motion are not as effective as you might expect. The unemployment levels are still high and the commodity prices are low so people who live exclusively from agriculture and other similar activities can’t even think about savings or investments. To complete the picture, the energy and food prices are high and this is a fact that leads most of the population to base their existence on loans.

According to the report mentioned above, this situation affects children (0 to 17 years old), women, black Afrikaans, people from rural areas, and people with little or no education. Now, if you consider the victims, you have a pretty accurate painting of the future. Poverty has a huge impact on a child’s future as an adult and level of education so, if most children live under the poverty line, you can only imagine what the future holds for the South African society.

The number of young people trapped in households that earn below the median income per month is huge for an economy that wants to grow and flourish. According to statistics, 43.5% of the young South African people must live with $60 per month (797 Rand), which they have to share with their parents and siblings. These are the very people that will get to be unemployed by the age of 35, living in poor conditions, and having children of their own.

If we take a look back, at the period before 2011, you’ll notice that the country was showing promising signs of improvement. However, the 2006 – 2015 time period is a huge step back to the conditions right after the apartheid. So how was this possible? What went so wrong that people are going back to the Dark Ages?

The main hindrance is the political environment – the general idea is that, even though the policies it drew were promising, the government was not capable of implementing them. The highly-promoted National Development Plan that has as main goal the eradication of poverty in South Africa by the year 2030, looks good and polished, but none of the set goals have been achieved until now. This happens because the plan has no support from the government and no one is interested in following the plan.

Another factor that keeps the economy down is the financial crisis. If some countries managed to go through it and get back on the horse, South Africa is still fighting the effects that were delayed by the infusion of capital that came with the FIFA World Cup in 2010.

How to Reverse these Effects?

In spite of the harsh reality described above, there are people who manage to live a decent life. And these are black people, that come from poor families and who managed to raise their head above the mumbo-jumbo it is the political and educational environment in SA today.   

Well, this was only possible because they had access to a higher level of education, which is quite difficult to achieve as a poor child in an SA region. However, according to the data we have from Stats SA, out of the people who had a post-matric qualification, only 8.4% were struggling with poverty. On the other hand, out of the young people who didn’t have access to a formal education, 79.2% struggle with poverty.   

This situation, divides the young population into two main categories (poor and non-poor) tracing a huge gap between people who should be sharing a common pool of values and dreams. According to SA Stats, the difference is felt in various life aspects and has a powerful influence on the economy at a micro and macro level.

First, the difference in the level of expenditure is huge, with about R31,000 for poor households and about R150,000 with non-poor households. As you can expect, this is supported by a difference in income with R46,000 for poor households and R199,000 for non-poor households. The list of differences continues, but the basic idea is that non-poor households have better access to hygiene and services than poor households. This leads to a series of effects that will be felt by the economy and society as a whole.

So, to avoid thickening the rows of the poor households, the best way to a better future is through education, both financial and general.

Financial Education

The fastest way to financial education is through actual courses that will teach students how to get in charge of their finances.

It seems that the financial literacy level among South African people with a good level of income is somewhere at 51%. While it may seem like a good thing, this number also shows that 49% of the people who earn well enough to maintain a good lifestyle can’t manage their finances.

Actually, according to a study by the Financial Services Board, many households with high-income levels couldn’t be classified as financially stable. This is sole because these people were not capable of taking control over their finances and had credits and debt on their profile.

It seems that people in South Africa love the luxury lifestyle even when they can’t really afford it. Of course, the result of this lifestyle is high credit use, which means very few people are actually considering savings or investments.

Besides the exaggerated lifestyle, many households only have one source of income. Now, even if the income is quite large, it is difficult to support an entire household and it will never be enough for savings or financial investments.

Both the exaggerated lifestyle behavior and the household with one source of income are normal in a developing country. However, with a bit of financial education and severity, most people would have a better chance at putting the bases of their own business or making a major investment into something that can ensure their future.

Still, until you manage to get a course that will help put your financial life in order, below are some basic and very useful steps to help you pull through.

1: List all your Sources of Income

The first step to financial independence is knowing how much money get in your household every month. If there is only one source of income, you can do a list of all the possible sources and how to tackle them.

By knowing how much you make every month, you know how much you can spend without getting into debt.

2: Know how much you spend

Once you’ve completed the income list, it’s time to make another one: a list of how much you spend and where. Start with the expenses that show up every month (phone bill, water, energy, sanitation, rent, and so on) and then move on to food, clothing, entertainment, and other things.

Make sure you don’t forget any repayments or other debts – it’s important to include these because they are also considered expenses (even though they are temporary).

This list will help you see where most of your money is going. Even though you think you know, you’ll see there are expenses you don’t really pay attention to, but represent quite a big part of your expenditure total. It’s also a great chance to identify the unnecessary expenses and cut them off or reduce them.

3: Pay the Bills on Time

It’s important for your financial health to pay all your bills on time (if you can). So, if you tend to forget or simply miss some deadlines, put together a bill payment schedule an make sure it’s easy to see. There is also the possibility of automatic payments set directly in your bank account, but this works with recurring bills (water, energy, rent, and other bills that come every month).

This aspect is important because bills that are paid late gather penalties and can lead to your household being cut off from certain services. Finally, if the amount is big, you can get sued by the company that provided the service and this will translate into a negative financial profile.

4: Setup your goals

By setting up goals, you plan your financial future and decide where you want to be in the short and long term. Thus, your goals for the short term could be something like cutting off bills or pay off the credit you just took.

In the long term, your goals could be a bit more grandiose like creating a savings account for your own house or saving to start your own business. You could also consider a retirement plan or even an emergency fund so you won’t be unprepared when something unexpected happens.

If you’ve got debt, one of your main goals on the short to intermediate term must be getting out of it. The same goes for the case when you’ve been blacklisted – it’s important to have a clean financial record in order to have a healthy business (or even life) approach.

5: Make a budget for everything

No money should be left unallocated! For this, it’s important to figure out where every coin goes each month. Subtract the amount of expenses from the amount of income and, if there is any extra left, assign it to one of the funds mentioned above. This way, you avoid spending money without purpose and work on making your goals a reality.

How to Work with Savings

Many people tend to ignore the savings account and move directly to an investment where the interest is higher. While it may seem like a good decision, in the long term, the savings account may have more benefits. This is one of the reasons why most financial specialists recommend that you first have a savings account and only then consider investing.

The reasons behind this recommendation are quite solid. First, when you have savings, you are more secure from a financial point of view. These are money set aside for various emergencies or situations that occur in life and usually are quite costly (sending kids to college or celebrating a major event).

If you manage to put aside some money every month, you discourage reckless spending and get a step closer to bigger goals. It’s also a great example for the future generation (your children) and is the right direction to take in an economy as unstable as the one of South Africa is.

However, you should be very careful when you choose where to open your savings account. Even if the interest may be smaller, it’s always best to choose a well-known bank that can also offer insurance, in the case something happens with your account. Otherwise, you may just end up flushing your life savings into a scam or company that can’t promise any type of help in the situation things go bad.

It is important to do your research on this matter and maybe talk to a specialist who can guide you towards several financial institutions with a good reputation. Sadly, scams with bank accounts and savings are quite popular in countries with a shaky economic status and the most vulnerable are the people who don’t have a solid financial education.

Investments

Now that we’ve covered the savings talk and you are well set in your financial life, it’s time to talk about investments. Seen from outside, South Africa is considered a great region for investors as it is considered the economic powerhouse of the continent. Even more, even if the economy is slouching, it is still on an upwards going curve, and this is promising for someone looking to invest. Finally there are plenty of natural resources that can be mined and extracted using the cheap workforce.

But these are aspects that don’t really matter for the local South African people who don’t have the money to invest big. So how can the regular Joe invest his money in order to make some profit? Well, the solution is to invest smartly.

Where to invest in South Africa

Equity Investments

According to specialists, equity investments are the most attractive right now. This investment is highly liquid and you can choose to invest in a mutual fund or a tax-free savings account. Finally, the effort to invest is minimal and the assets cannot be reclaimed.  

There are a number of long-term investment opportunities right now, and the private equity funds are growing (up to 3.2% of SA’s GDP) so you should seize the moment. Since the social issues that tarred South Africa apart were resolved, lots of industries started to thrive.

For instance, the Global internet and entertainment group Naspers and the MTN Group invested heavily in technology, increasing their market value in a very short time. Even more, the profitability of this sector is expected to grow as specialists expect the internet access in the country to double in the next five years.

Retail is the next sector where growth was registered fast and smooth. With the development of technology, retailers like Pick n Pay and Shoprite Holdings register a huge development all over the country. They have stores in various locations, but you can also shop online and have the products delivered.

Finally, the private healthcare sector is also a good niche for investors as prices have been increasing for the last 10 years. There are three main groups that dominate 80% of the market and should catch your attention: Netcare, Mediclinic, and Life Healthcare.

To give you a bit of help in starting your life as an investor, here is a list of recommended online stock brokers and platforms:

  • Easy Equities (most suited for beginners) – their minimum commission is 1c and the rate of commission is 0.25%;
  • Nedbank – with a commission of R70 and a variable rate of commission between 0.7% and 0.35%;
  • Sanlam – R75 minimum commission and variable commission;
  • Saxo Capital Markets – minimum commission of R 100 and 0.34% rate of commission;
  • Absa – R120 minimum commission;
  • Afrifocus – R150 minimum commission.

Property & Housing

The next great investment opportunity is property. Cape Town is currently developing and the property situated in the city or around will grow in value as well. So, if you have the possibility, this is a great investment with an attractive return in a few years. Also, it helps to know that the annual return of the Eastern Cape is 7.8% while that of the Western Cape is 9.3%.

However, make sure you understand that the investment in property is a long-term one (20+ years). You can consider rental income until the property is ready to be cashed out, but this is highly dependent on the location.

The housing market in South Africa has lots of ups and downs but it is still a good investment, if you’re smart about it. For instance, the Western Cape housing market is currently strong because it is supported by foreign investments and South Africans who want to migrate from other parts of the country. The Western Cape area is considered one of the strongest due to economic growth, good lifestyle, and management. It offers good job opportunities and the area is great for young families.

However, even if these are markers that promote a stable and long-lasting housing market, there are signs that put this stability under question. So, before you invest, make sure to do your research.

The Benefits of becoming an Investor

Now that you have an idea of the best ways to invest your money when living in South Africa, you may also be interested in learning about the benefits investors get. Investments are great ways of making your money work for you. Even more, if done correctly, such an investment can be your retirement fund and can ensure a life without financial worries once you don’t have a day job anymore.

If you put it right next to your savings account, investments are another safety line and contribute to your financial growth and general development.

The Risks

Yes, there are risks – all investments carry risks and you must be very aware of them in order to make an informed decision.

First, you should never invest without doing your research or talking with a specialist. If someone tries to force your hand by promising huge returns without any risk, then you should walk away as fast as possible. This is only a scam to get to your money!

The main risk comes from the economic environment. Just imagine that you just bought property in Cape Town and the plan is to keep and improve it for several years so you can sell it when the prices rise. Still, because the economy doesn’t go well, people start to leave the city and foreign investors lose interest. This would be a negative scenario where your property is no longer a good investment, but a liability. Still, South Africa is in continuous development right now and investors are attracted by the possibilities it presents. So, while you run the risk of things going badly, there are over 50% chances of things going well for you and your investment.

When you make an investment, it’s important to analyze the risks and the reward. Devise a scenario where you calculate the impact of said risks on your financial health and make sure the reward is worth the effort. Also, it’s best to take a class or talk with a specialist when it comes to investments – people without the proper financial education tend to make rushed decisions and this is not something you want when your money is on the line.

Avoiding Debt

At the end of the day, one of the most important steps towards financial health is avoiding debt. If we consider that most people in South Africa have some sort of credit, this step is very important for your financial education.

First, it’s important to mention that loans are normal and should be considered when they are needed. For instance, you can get a loan to start your business or to supplement your income for a short period of time until you manage to get settled on a new job. However, you should avoid getting loans to support an unrealistic lifestyle that can’t be sustainable and will only lead to debt.

There are various services and institutions that offer loans, but if you’re looking for a safe service with great rates, RainFin is a great solution. RainFin connects people and creates a community where people can help each other out. It also offers good loan rates and allows South Africans to invest in people who need loans.

Now, if you had to take on several small loans, one great way to keep track of all is to use a consolidation service. These services will finance all your credits and you’ll end up with only one monthly rate which is simpler to manage and keep track. Still, since the list of debt consolidation services in South Africa is quite long, here is a list of the top three most reliable providers:

  • Nedbank  – but only via personal loans, and only to consumers with good risk profiles that pass the affordability criteria;
  • SA Home Loans – but only to people with a good credit profile;
  • Absa – but only standard personal loan products.

Tidy Up your Monthly Budget

The best way to stay out of debt is to first figure out how much you can afford to spend. You can do this by comparing the level of income with the level of must-have expenses such as bills, food, education, clothing, rent, and so on. If you can’t support the basic expenses with what you earn, there is no way you could afford to get a loan and pay it in time. Even more, a serious financial institution won’t clear you for a credit in this situation anyway.

On the other hand, if you can afford the basic expenses but you seem to be out of money every month, try to cut the expenses that are unnecessary. This will leave you with a bit of extra income that can be directed to savings accounts or investments.

To make this task easier, there are several online apps that work on both Android and iOS smartphones, and can help with tidying up your monthly budget. Here are some of the most popular (but you can find more):

  • You Need A Budget (YNAB) – this app works on the idea that your money should be divided into categories of expenses. This way, every rand is accounted for. The app also encourages users to save money for larger expenses, which is very wise.
  • Goodbudget – the same categorization principle is applied here but the app also allows you to connect bank balances and share the budget with other people (for the household budget).
  • OnTrees – you won’t be able to put your money in different categories, but the app allows you to see all your bank accounts in one place. This is more useful when you want to know where your money is going and less for planning your financial future.
  • Wally – great for people who want to know exactly where their money is spent. The app offers a global view of all your accounts and can even track your movements (due to location services). This means you’ll actually get a map of your spending habits.
  • Money Dashboard – this is another tracking app that can give you a more detailed view of your spending habits.

Plan your Income & your Future

It’s also a good idea to find ways to increase the amount of income by either finding new sources or getting a new job where payment is better. If your current level of education doesn’t allow for a better job, there are governmental programs that offer free education and professional re-qualification for people who want to grow. If you can’t find an active one, make sure to keep up to date with the news from the education department.

Finally, the best way to avoid debt is to think ahead. This means planning your savings and retirement account in order to be prepared when an emergency knocks on your door. If you start young, you’ll be able to increase your savings and take advantage of the interest rate before you need to make a major withdrawal.

Overall, being financially independent in South Africa is more than a possibility, it’s a fact! With a bit of planning and clever thinking, you can build a great future for yourself, even if you were unlucky enough to be born in a poor household. As long as you keep up with your education and keep your financial habits in order, the sky is the limit for you!

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