"Make it your mission to understand & invest wisely. Everyone has the potential to succeed in their search for true wealth & happiness & everyone can be successful in their pursuit of financial freedom." Contrarian Invest

Monday, 12 November 2012

Breaking Free From Financial Bondage


Most of us work hard for our money, forty hours or more a week, and once we are set free from work we like to spend our hard earned cash by going shopping. We buy food, clothes and all sorts of goodies and then are left wondering where our money went.

Many people owe much more than we are worth (in savings and investments). It's not how much we earn that counts, but rather how much you are worth that matters. Dealing with our finances is all about our attitudes and beleifs about money. If you want to gain control of your finances, you need to make some behaviour adjustments.

Getting into debt was a process, getting out of debt is also going to be a process and a process takes time. If things are going to change then you have to take charge. You can't carry on in the same old way and expect things to get better, you have to take charge.

One cannot carry on living in denial by not opening your bills and expecting them to go away etc. And no, denial is not a river in Egypt. You cant carry on burning plastic at the mall and expect to get out of debt. You need to take control of your financial life and embark on a process of change.

These are simple steps to follow to breaking free from debt:

1. Pay yourself first - 10% and invest it
2. Get rid of your debt by making a list
3. Spend less than you earn through a budget


If you want to break free from debt, then it’s going take action. Getting into debt was a process and getting out of debt is also going to be a process. A process takes time and it takes courage, you can’t carry on behaving in the same old way and expect different results.

You can’t carry on living in denial, thinking that you will face your problems another day. To break free we need to embark on a process of change. Today, I will be discussing the first of 3 steps to financial freedom.

Number one is to pay your self first, 10% of your income and invest it. This is the secret to creating wealth. Wealth is not created in a week, a month or a year. It is built by making small continuous investments over a long period of time. Warren Buffet starting making investments at 10 years of age. Today Warren Buffet is one of the richest men in the world.

Many people delay saving, thinking they will start when they are out of debt, or when the car is paid off etc. There are a million reasons why one can put off saving.

If one is going to break free from financial bondage then drastic action is required. The first thing on your personal budget is to pay your self first 10% of your nett income. The 90% can be used for everything else that needs to be paid.

Out of every 100 people reaching retirement age in SA:

• 31% will be forced to continue working
• 47% will be dependent on family
• 16% will depend on a meagre state pension

And only 6% will be able to retire financially independent!

(Based on life assurance forecasts)

Now, what about you? Are you going to keep on delaying taking action? Are you going to be like the majority of South African’s living in denial spending all their earnings on things they don’t need?

Or, are you going to have the courage to take action and embark on a journey of breaking free from financial bondage and take the steps into financial freedom?


Get Rid Of Debt Using The Snowball Effect
This is a very effective and simple solution to getting out of debt and can be fun once you start to see the results. All it involves is writing a list of all your debt on a spreadsheet:

Start with the largest debt first going down to the smallest one. Then, once the smallest debt is paid off take that instalment and add it to the next debt. Carry on until you have paid off all your debt, this in record time.

Here is an example of Joe Soap, who is in a lot of debt:

- - - - - - - - - - - - - - Amount Due / Instalments / Months Left

Home Loan:- - - - - - R800 000 / R 8000 p/m / 300 (25 years)
Car HP: - - - - - - - - -R 90 000 / R 3500 p/m / 54 months
Personal Loan:- - - - R 50 000 / R 4500 p/m / 45 months
Credit Card: - - - - - R 40 000 / R 4000 p/m / 18 months
Clothing Account "A": R 5 000 / R 500 p/m / 12 months
Clothing Account "B": R 2 500 / R 350 p/m / 12 months


Joe Soap spends on luxuries:

DSTV - R500 p/m
Entertainment - R800 p/m

To get out of debt Joe needs to take massive action. This means he should make some sacrifices now, for longer term rewards. Joe decides to sacrifice the DSTV and he halves the amount he spends on entertainment. This gives Joe an extra R900,00 per month to use to pay off his debt.

Immediately he takes this R900 and adds it to the R350 instalment of his Clothing Account "B".

R1250 p/m is paid into that clothing account, it only takes two months to settle this account instead of 12!

In month 3, Joe uses the R1250 p/m adds it to the R500 instalment against Clothing Account "A" and he makes payments of R1750 p/m towards the remaining R4000 balance. Joe, has now settled this account in just 5 months, 7 months ahead of schedule!

Joe repeats the same plan of action and he takes the R1750 p/m adds it to the R4000 instalment of his credit card and makes R5750 p/m instalments against the remaining balance at this stage of R34 400 p/m. It only takes Joe 6 months to settle his credit card.

Only, 11 months into the plan Joe has managed to fully settle 3 major accounts that seemed overwhelming in the begining.

From here Joe added the R5750 plus the R4500 monthly instalment on his personal loan amounting to R10 250 p/m and paid off the balance of his personal loan, at that stage R18 500 in less than two months.

Just over a year, in a record breaking 13 months Joe has now paid off the majority of his debt and is way ahead of schedule. He then decides to repeat the plan and starts to use the extra R10 250 p/m adding it to the regular R3500 installment on his Car's HP. At the time the settlement balance was R67 000. By making monthly instalments of R13 750 p/m Joe managed to settle the HP withing 5 months! Unbelievable, Joe's Car is now fully paid for 18 months after he started the break free from debt snowball effect!

In only 18 months Joe managed to get out of a mountain of debt. The only debt Joe has left is his home loan. If he wanted to from here he could continue to use the snowball effect and use the extra R13750 p/m he would normally have spent on his debt and put this into his home loan.

That would contribute an extra R165 000 p/a into Joe's home loan and would make it entirely possible to pay his home loan in only 5 years.

Through a bit of sacrafice and some action you can like Joe get out of debt and break free from financial bondage for life!

No comments:

Post a Comment

Warren Buffett Quotes

Leadership Quote of the Day