The term ‘financial freedom’ rolls off the tongue quite easily, but it is not necessarily as easy to define or to 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 support you on this journey. This article explores the key areas to understand in order to achieve financial freedom. This includes making the right choices with regard to planning, products and investments, all of which must be underpinned by a disciplined approach.
Defining financial freedom for yourself
Before getting into the details, it is useful to start by defining what financial freedom means to you. This is crucial, as it has different meanings for each individual, and the way you define it will set the scene for the decisions you need to make. For one person, financial freedom may simply mean being able to afford regular travel, for another it could mean the ability to afford quality education for their children. In its simplest form, achieving financial freedom means taking ownership of one’s financial position and having the ability to achieve one’s goals through all phases 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 – relative to where you want to be. Draw up the landscape of your current financial position in respect of the following factors:
- Debt
- Income
- Savings
- Expenditure
- Assets
With the help of your advisor, you can then develop a plan by:
- creating short-term budgets on a regular basis and sticking to these,
- incorporating long-term savings plans (e.g. retirement and education), and
- keeping in mind that risk cover, medical aid and a will are also critical elements of your overall financial plan.
Choosing the right products along your financial freedom journey
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 wealth. The table below highlights the key features of a variety of financial products to help you make more informed product choices that are suitable for your needs.
| Key features that drive choices | |
| Retirement annuities (RAs), preservation funds and employer retirement funds | · Saving for retirement is essential. This may be difficult to appreciate early in one’s retirement savings journey, but retirement fund products (e.g. the PSG Wealth Retirement Annuity and PSG Wealth Preservation Fund) are an essential component in helping you achieve financial freedom in the long run.
· The most important aspect of these products that one needs to understand is that it is crucial to start contributions as early as possible. · Contributions to these products are tax deductible and all the returns on these products are tax exempt. · Access to capital in these products is limited, which makes them effective products for preserving capital.
Tip: Growth assets are often the most suitable underlying investments in these products.
|
| Tax-free savings accounts (TFSAs) | · TFSAs, such as the PSG Wealth Tax Free Investment Plan (TFIP), provide additional flexibility in terms of investment options and access (compared with RAs and preservation funds).
· The amount you can invest in these products is subject to contribution limits of R36 000 a year and R500 000 over your lifetime. · TFSAs can be used to support financial freedom in retirement or provide efficient tax-free savings for other purposes, including saving for education or unforeseen events. |
| Endowments | · Endowments can facilitate tax-efficient investing for individuals who fall into a marginal tax bracket in excess of 30%. This is because the tax rate on investment returns is effectively 30% for individuals investing in endowments.
Reminder: Your ability to access all your endowment savings is limited in the first five years. |
| Living annuities | · Living annuities, such as the PSG Wealth Equity Linked Living Annuity (ELLA), are designed to provide an ongoing income in retirement.
· The benefits of living annuities are generally optimised by having a financial advisor to help manage fund allocations and withdrawal rates on an ongoing basis. · It is very important to control annual income withdrawals from these products. Withdrawing too much can rapidly deplete capital over time.
Tip: With the increase in longevity risk resulting from a longer life expectancy, it is important to consider continued investment in growth assets within your living 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 unit trust funds available in South Africa, so selecting the right ones can be a daunting decision to make.
· A PSG Wealth financial advisor can give you the necessary guidance and access to our market-leading PSG Wealth Solutions unit trust funds. These funds are designed to support the above mentioned products and to achieve optimal client outcomes in relation to return and risk. |
| Direct shares | · Investing directly in shares affords a greater degree of flexibility in choice compared to unit trusts. However, investing directly means there is no fund manager, so this investment option is more suitable for knowledgeable and experienced investors.
· If you prefer investing directly in shares, you need to ensure that you understand the risks involved, in particular the risk of limited diversification across shares. · Consider appointing a financial advisor with the necessary qualifications to manage a share portfolio on your behalf. |
Monitor your decisions regularly
As your financial freedom journey develops, you may need to adjust your plan accordingly. Revise your decisions, but always stick to the basic principle of financial discipline. A financial advisor can help you understand what you need to consider to achieve financial freedom, guide you in making more informed financial choices, and help you keep your plan and investment products on track.
Jan van der Merwe is head of Actuarial and Product at PSG Wealth.
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