Any debt that costs more than you can earn from your investments after taxes should be paid off as quickly as possible. As a general rule, the only low-interest debt is mortgage debt or a student loan for those that have one. This is considered "intelligent debt" “I will come back to this notion” since your money can earn more for you if you invest it than what you'd save by paying off the loan. If your mortgage interest rate is 8%, your credit card rate is 20% and your investment return rate is 10%, pay off your credit card first, then invest anything remaining.
We will
explore this further as we discuss in detail the different types of debt – and
get to define what an asset is and what is a liability? Remind me Please.
8.
Invest direct from source
or use automatic systems
Many of
us argue that it is impossible to put money aside once it hits our bank
accounts and can be accessed easily. Most are honest.
I
therefore encourage that you use source deduction into an investment vehicle,
have an arrangement with your employer to allow that your money is
automatically invested before you receive your net. By having money deducted
beforehand into your pension plan, or by setting up your own automatic monthly
transfer from checking to savings, or having a set debit order into your
investment account with the likes of African Alliance, your money will be out
of sight and out of mind.
For long-term investments, put the money somewhere illiquid like
in a fixed term unit trust so that so that you won't be tempted to steal from
your future self.
For
short-term, you'll need to keep the money accessible, but don't make it too
accessible. For example, if your checking and savings accounts are at the same
bank, it's all too easy to rapidly transfer money from your savings into your
checking account. If you have these accounts at two different institutions, the
transfer will take time, and that time delay may be enough to cause you to
rethink your decision if you're trying to spend your savings on something you
shouldn't. you could also park your funds in money market (a superior call
account) which by definition while liquid and save, is an investment that can
buy you the time needed to change your mind on your spend.
9.
Reduce Spending in a
Particular Category
Remember
how we said that budgeting isn't about deprivation, it's about putting your
money to its highest and best purpose? One of your new budgeting goals might be
to reduce your spending in a particular category, now that you know where your
money is going, so you can put that money toward something that is a higher
priority for you.
10.
Plan for Major Changes
As
mentioned earlier, a budget lets you model in advance how a major purchase or
life change will affect your finances. Instead of wondering if you can afford a
house or panicking about whether you and your spouse can afford to live on one
income while the other stays home to raise a child, you'll have the data you
need to crunch the numbers. You'll find out before you make any change whether
you can afford it and what sacrifices you might need to make.
11.
Experience the Freedom of Having Money in the
Bank
By
helping you sock away money each month, budgeting is an important tool for
achieving financial freedom. The
ultimate freedom, of course, is being able to retire, but along that winding
road are opportunities for many rest stops if you have money in the bank. Those
stops might include:
having a child - starting your
own business
- going back to
school
- taking an extended
vacation
Budgeting makes it easier
to achieve all of these goals!
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