Another rate hike of 50 basis points and the probability of more on the way call for us to become savvier with our money. We need to find ways to use money more efficiently and then divert the savings towards paying off debt sooner than later.

There are two debt instruments which can work in your favour if you take the time to really understand how they work and then use them together.

Access Bonds

Using your access bond to consolidate and warehouse your cash makes it a great piggy bank. A mortgage bond charges interest on the average daily balance throughout the month. The bank allocates a portion of the monthly instalment to interest and the remainder to the capital. The higher your average monthly balance in your bond the less interest is allocated and therefore more of the monthly repayment goes to paying off your capital. Effectively, you save interest at the rate of the loan which has now gone up by 0,5%.

Credit cards

Credit cards charge interest on the balance outstanding on the card at the billing date at the end of the month. If you pay up your card in full or as much as possible before the billing date then you save the interest (around 22%) for that billing cycle.

Use the two to your advantage

So why not leave as much cash in your access bond during the month and use your credit card wherever possible and then just before the billing date transfer as much cash as you can into your credit card? You would have then saved interest on your bond and then used free money from your credit card during the month. Credit cards also have an additional money-saving benefit as opposed to debit cards. They do not charge transaction fees so can be very efficient payment instruments throughout the month.

Discipline is required

Avoid the pitfalls of spending impulsively on a credit card. You need to be very disciplined to always have enough in your bond to cover your credit card balance. You should aim to spend less on the card over time leaving more in the bond on a monthly basis. This is a clear measurement that you are making progress with the management of your monthly income.

From the 1st of March 2016, the options for retirement have changed. The legislation comes into play which aims to standardise the various types of retirement funds which are available to us. Namely, provident, funds, pension funds and retirement annuities. The changes will make things a lot easier to understand and apply in the future as the current variations are complex.

The main changes point to provident funds which were not restricted, as the full lump sum could be taken at retirement. Retirement annuities were always treated like pension funds in that at retirement you could only take a third in cash and the remaining two-thirds had to be invested in a pension. Provident funds effectively become pension funds from the 1st of March. The new regulations bring all options into line levelling the playing field at retirement.

The advantages

Currently, there are varying deductions applied to provident, pension and retirement annuity funds.

The good news is that the overall deductibility of contributions to retirement funding increases to 27,5% to a maximum amount of R350 000 per annum. Any amounts over this capping can be rolled over into the next tax year and deducted.

Deductions are only allowed in the hands of the employee so you will need to clarify things with your employer to ensure that the correct tax is applied. Any contributions made by your employer will need to be neutralised by a fringe benefits tax on your payslip.

These changes are an ideal opportunity for you to sit down with your financial planner and revisit your retirement planning. There are benefits to be found in optimising your contributions towards your future funding taking full advantage of the new level of tax deductibility.

Debt is so easy to get into and so very difficult to get out of. Prevention is always better than cure but the reality is that we get enticed into debt over time and soon find ourselves in it way too deep. The cost of debt climbs quickly and robs us of the potential to create wealth.

Institutions make their money by lending money to you at a rate over time.
You can benefit by reversing the formula.
Interest + time = profit
You cannot reduce the interest rate but can reduce the time = less profit for the institution
Less interest for an institution means more savings for you
More savings for you compounded over time = more wealth for you

Here are 3 steps to getting ahead of your debt in 2016.
A debt trap can be likened to trying to fill up a bath with the tap on but leaving the plug out.

Step one
Put the plugin by making a conscious decision to get out of debt. The culprits need to be identified and cannot be allowed to increase anymore.
Credit cards, overdrafts, personal loans, store accounts, and outstanding taxes. All have to stop.

Step three

Keep a close eye on the water level. Divert the newfound savings back into paying off your debts. Targeting the highest interest-bearing ones first and then working through the next. Patiently keeping your living expenses well under control. A new year brings on a wave of price hikes. So your cost of living will be going to increase anyway. Expect 2016 to be really tough. The cost of debt will probably increase as interest rates are on the rise. Debt is the enemy so you need will have to squeeze those living expenses even more now than ever before.

Reducing debt saves you fortunes and only saving for yourself instead of paying the bank will put you on the road to financial freedom.

The beginning of the new year is a great time to update your personal balance sheet.
The exercise is invaluable in your personal financial planning as it creates a snapshot of your actual worth in relation to what you own and what you owe. Your so-called “Net Worth”.

OWN – OWE = NET WORTH

All it takes is a sheet of paper with two columns listing the current value of all your assets on one side and your liabilities (the outstanding loans) on the other side. Subtracting the total liabilities from your total assets leaves you with a current value of what you are actually worth. This net worth provides you with a realistic view of how well you are doing with your financial planning. If the figure is growing year on year then you are on the way to improving your wealth. If it is not growing you are effectively getting poorer.

Bear in mind that your net worth needs to improve above the inflation rate to keep its real value. So if inflation is running at 6% then your net worth should be improving above this rate year on year to keep your net worth value real.

Ways to improve your net worth are found in:

Reducing your liabilities
Targeting your loans and getting rid of them sooner. Interest on debt is often higher than the returns found on investments. Especially, when one considers the risk needed to achieve the return. Paying off debt not only improves your net worth but also frees up more disposable income from the interest charged for you to invest more.

Acquiring growth assets
Investments that grow consistently over time should be targeted. Especially, those which compound your growth. In other words, investments which produce returns which you reinvest, effectively buying up more. Compound interest is a magical phenomenon in the financial world and needs consistent positive returns over the longest possible time to make its magic.

Keep a close eye on your personal balance sheet. It is the starting block towards financial freedom.