The term “financial freedom” slips quite easily out of language, but it’s not necessarily as easy to define or achieve in practice. Achieving and maintaining financial freedom is a process and an ongoing journey of discipline, for which there are unfortunately no shortcuts. That said, you are not alone in understanding and getting the right products to help you on this journey. This article explores the key areas to understand in order to achieve financial freedom. This involves making the right choices in planning, products and investments, all of which must be supported by a disciplined approach.
Define financial freedom for yourself
Before going into the details, it is useful to begin by defining what financial freedom means to you. This is crucial, as it has different meanings for each individual, and how you define it will set the stage for the decisions you need to make. For one person, financial freedom may simply mean being able to afford regular travel, for another it may mean the ability to provide a quality education for their children. In its simplest form, achieving financial freedom means taking ownership of your financial situation and having the ability to achieve your goals at all stages of life.
Key decisions start with a plan
Once you’ve defined what financial freedom means to you, the next step is to assess where you are now – versus where you want to be. Map out your current financial situation by considering the following factors:
- Debt
- Revenue
- Savings
- Spent
- Assets
With the help of your advisor, you can then develop a plan by:
- establish regular short-term budgets and stick to them,
- incorporating long-term savings plans (e.g. retirement and education), and
- bearing in mind that risk cover, medical assistance and a will are also essential parts of your overall financial plan.
Choosing the right products along your journey to financial freedom
Financial products alone do not pave the way to financial freedom. Instead, they provide the means to achieve financial freedom by helping you accumulate and preserve your wealth. The table below outlines the key features of a variety of financial products to help you make more informed product choices that suit your needs.
| Main characteristics that guide the choices | |
| Retirement Annuities (RA), Preservation Funds and Employer Retirement Funds | · Saving for retirement is essential. This can be difficult to appreciate at the start of your retirement savings journey, but retirement fund products (for example, the PSG Heritage Retirement Pension and the PSG Heritage Preservation Fund) are an essential element to help you to achieve long-term financial freedom.· The most important aspect of these products to understand is that it is crucial to begin contributions as soon as possible. · Contributions to these products are tax deductible and all returns from these products are tax exempt. · The access to capital of these products is limited, which makes them effective products for preserving capital. Tip: Growth assets are often the most appropriate underlying investments in these products. |
| Tax-Free Savings Accounts (TFSA) | · TFSAs, such as the PSG Wealth Tax Free Investment Plan (TFIP), offer additional flexibility in terms of investment options and access (compared to RAs and preservation funds). · The amount you can invest in these products is subject to contribution limits of R36,000 per year and R500,000 over your lifetime. · TFSAs can be used to support financial freedom in retirement or provide effective tax-free savings for other purposes, including saving for education or unforeseen events. |
| Endowments | · Endowments can facilitate tax-efficient investing for people who fall into a marginal tax bracket above 30%. Indeed, the tax rate on investment returns is effectively 30% for individuals who invest in endowment funds. Reminder: Your ability to access all of your endowment savings is limited for the first five years. |
| Life annuities | · Life annuities, such as the PSG Wealth Equity Linked Living Annuity (ELLA), are designed to provide continued income in retirement. · The benefits of life annuities are generally maximized by having a financial advisor to help manage fund allocations and withdrawal rates on an ongoing basis. · It is very important to monitor annual income withdrawals from these products. Withdrawing too much can quickly deplete capital over time. Tip: With increased longevity risk resulting from longer life expectancies, it is important to consider continued investment in growth assets within your life annuity. |
| Unit trust funds | · Unit trust funds are underlying investments of the investment products listed above and are the building blocks for achieving one’s overall investment objectives. There are many different mutual funds available in South Africa, so choosing the right ones can be a daunting decision to make. · A PSG Wealth Financial Advisor can provide you with the necessary advice and access to our market-leading PSG Wealth Solutions mutual funds. . These funds are designed to support the products mentioned above and to achieve optimal results for clients in terms of return and risk. |
| Direct actions | · Invest directly in actions offers greater flexibility of choice compared to mutual funds. However, investing directly means there is no fund manager, so this investment option is more suitable for knowledgeable and experienced investors. · If you prefer to invest directly in stocks, you should ensure that you understand the risks involved, in particular the risk of diversification between stocks. · Consider appointing a qualified financial advisor to manage a stock portfolio on your behalf. |
Regularly monitor your decisions
As your journey to financial freedom grows, you may need to adjust your plan accordingly. Review your decisions, but always respect the basic principle of financial discipline. A financial advisor can help you understand what you need to consider to achieve financial freedom, guide you to make more informed financial choices, and help you keep your investment plan and products on track.
Jan van der Merwe is Head of Actuarial and Product at PSG Wealth.
This article originally appeared on Moneyweb and has been republished with permission.
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