Putting a personal financial plan into action

After writing my review on the South African version of Dave Ramsey’s Total Money Makeover, I received an email from a reader who shared his experience of getting his finances in order after reading the US edition of Total Money Makeover several years ago.

James’s experience of travelling the road to financial health not only to shows that it is possible, but also how any plan needs to be adapted to your own circumstances.

“It’s an excellent read, and I will recommend it wherever I can, but in some ways I am finding it tricky to follow the steps to the letter,” says James who explains that it is easier for someone just starting out in a career to follow the steps in exact order. “For someone like me, getting onboard halfway through, it is a bit more challenging but it is better than blowing cash on cars and exotic holidays”.

Total Money Makeover provides seven “baby steps” on your road to financial freedom. The idea is that by breaking it down into small steps you achieve small victories and this gives you motivation to tackle the next challenge.

Considering that he started the process several years into earning a salary, James believes that after following steps one and two, you could follow any combination of steps three to six. “You could shift your emphasis now and then as your needs change,” says James, although he also acknowledges that an individual may be frustrated by the seemingly slow progress due to attending to more than one step at the same time, in which case following the exact order will work better. “The last thing you want is for someone to give up because of the perceived lack of progress,” says James.

Baby Step 1: Save the first R10 000 of your emergency fund fast

“I recently had a car accident and I was able to pay for the excess and car hire from my emergency funds. I now need to replenish the emergency fund out of my salary over the next two months,” says James.

Comment: Life happens and those smaller emergencies like a car accident or broken geyser are fairly frequent events so having a startup emergency fund of R10 000 prevents you from having to take on debt just when you are starting your journey to financial freedom.

Baby Step 2: Get rid of debt

“My wife and I haven’t had consumer debt for close on around 10 years now. The only debt we have is our access bond,” says James.

Comment: This is a great start to any financial plan. Not having debts to repay each month gives you the extra money to start building wealth and becoming financially free.

Baby Step 3: Finish the emergency fund of 3 to 6 months of expenses

“I currently keep my emergency funds in my access bond. I can withdraw the 3 to 6 months amount from my access bond and place it in a separate money market account as per the book, but my money is just as accessible in the bond, although the risk is that the bank closes the access facility,” says James.

Comment: The decision to keep your emergency funds in your access bond is a personal one, but it is often better to have separate goals. For some people it may be better to have emergency funds in a separate account so you know exactly where you are in terms of paying off your home loan.

Baby Step 4: Maximize your tax-free retirement saving

“I currently contribute 10% of our gross income to retirement funding. To push this up to 15% will be a challenge. My wife has substantial pension fund in a preservation fund which helps,” says James.

Comment: Your wife started young and preserved her retirement funds which will make a significant difference to the value of your retirement funds. Now would be a good time to sit with a financial advisor and assess your current retirement provision. Make sure you are not over-committing to paying off your home loan at the risk of underfunding your retirement – remember you can’t eat your house. You also want to maximize the tax-free savings for retirement.

Baby Step 5: Save for your child’s education

“I have three children and save R200 per child in the Fundisa fund. It used to be R600 per child, but I lowered the amount in December to redirect funds to retirement savings. I need to increase this to at least R650 per child per month, since my children are my priority. I will continue with R200 per month into Fundisa to allow me to take advantage of the government subsidy and put a further R450 per child into a unit trust. My concern is the kids’ schooling. I would love to start saving now for their schooling so as to have a year or two’s fees saved in advance, but  I can only save a limited amount for now,” says James.

Comment: As you say, your children are your priority. Many parents will complain about school fees but drive around in cars with R5 000 a month repayments! It is a great strategy to take advantage of the Fundisa subsidy and then invest in a high-growth unit trust. Children’s education is very important but so is your retirement. Finding a balance is important.

Baby Step 6: Pay off your mortgage

“Even if I withdraw emergency funds from my bond, we will still be ahead of the curve in terms of capital repayment. So good progress made on this step. We are now almost five years into bond term, and have paid off almost 75% of initial capital amount. However we are busy with alterations to make space for our growing family – so have used the access facility. Outstanding bond will grow to about 40% of initial bond amount,” says James.

Comment: You have used the opportunity before having children to pay off a significant portion of your mortgage. It may be more difficult now that you have children with school fees and other expenses. Find a balance between paying your home off and saving for your children’s education. Ramsey’s point is that the step before paying off your mortgage is saving for education.

 Baby Step 7: Build Wealth like crazy
“We are not there yet!” says James.

Comment: By the time you reach this stage you will have no debts, savings for your children and a fully paid house and car. You are able to invest a significant amount of your salary into high-growth investments. For example, if as a household you earn R20 000 a month, without debt you could easily save half of that. In ten years’ time that would be worth R1.5 million in today’s value. The opposite of that is if you had R1.5 million of debt, you would be paying out more than R10 000 in interest repayments alone without even starting to pay back the capital!