Living frugally is one of the best paths to financial independence. A lot of people make a lot of money only to spend it on things they don’t need. These people never become financially independent and are always a few pay checks away from being poor. This is a guide on how to live frugally and get financial independence in South Africa.
Living frugally is not the same as living on a tight budget. Being frugal is self-imposed and it often means living way below your means. You don’t buy certain things because you realize that they are not that important, not because you can’t afford them. The huge majority of millionaires lead a frugal life.
The typical “millionaire lifestyle” is lived by people who have new found cash, like artists and athletes. These people usually don’t have any financial education and they become broke soon after ending their careers. Millionaires that built up their wealth through other means know that every Rand counts and should be used wisely.
Why should you live frugally?
Living frugally doesn’t mean you deny yourself nice experiences, it just means you live below your means. You could be earning around R45k a month and lead a life of someone who is earning half your income.
The number one reason why Daily Income recommends that you should live a frugal lifestyle is the peace of mind and financial freedom that comes with it. It doesn’t matter how much money you earn; there are always things that will require you to spend it. Someone earning R100k a month might not be satisfied with driving a mere AMG A45 and seek something like a Ferrari.
Which would be a huge financial commitment, a lot of people believe that money should be spent. They also assume that their source of income will never run dry, this is why only 6% of South Africans are able to retire comfortably. Living frugally means that you will have enough money saved up and not worry about covering emergencies. You won’t need to get into debt each time an emergency comes up and can afford to sustain yourself for a long time should you lose your source of income.
You are still living frugally if you earn R80k a month and lead a lifestyle of someone earning R40K. Living frugally doesn’t mean you should go and live in a shack and make your life very difficult. Finally, living frugally means that you have the option to retire earlier, you can retire in your early 40s, 20 years before everyone else.
1. House hacking
Accommodation often accounts for the most money on our total living expenses. Some people spend over 50% of their income on rent or mortgage payments. A lot of people often don’t mind paying over 50% on mortgage because it’s an “investment” and its value goes up.
It’s true, the value of a house does appreciate over time but guess what? You get nothing unless you actually sell the house. This means that while the value goes up, it can’t be realized, most mortgage loans span 20 years. The money you receive from your house will likely be used to buy another slightly better house. This means that your money doesn’t really earn you financial freedom, it just trades your house for a bigger one. Unless you are willing to sell your house and move to a cheaper house, something most people don’t want.
Which is where house hacking comes in, with house hacking you can buy a house for virtually R0. You buy a house, build a beautiful outside room, live in the outside room and rent out the main house. You will still live in the same yard and the property will be yours but someone else will pay for it.
The outside shelter doesn’t have to be a single room, it can be 4 rooms. This will save you the money that you were going to spend on your mortgage repayments. You can simply use this money to invest and generate more income for yourself.
2. Buy a second-hand car
Especially if you have not yet accumulated a lot of wealth. The difference between a brand-new car and a second-hand car is often emotions. You buy a house, something that appreciates in value as a “second-hand” but buy something that will lose over 50% of its value within the next three years on first hand.
Getting a new car is a huge ego and confidence booster, things that people value. But these are just emotions, a second-hand car with 30k kilometres is still very new. However, you will get it way cheaper than if you had financed it as a new car. Another trick is to buy cars that are 3 years old, these are cars that have lost a lot of their value but are still in a very good condition. You can get a Mercedes A class for around R250k if you buy it as a second-hand after 3 years.
However, if you really value social status and are determined to buy a new car, make sure you don’t pay more than 10%. Don’t pay more than 10% of your monthly income towards a car, use Uber and taxis if you must.
3. Avoid high interest debts
You might not want to completely cancel your debts because of credit scores. However, you should avoid taking on any debts that have a high interest, these are personal loans and other things bought on credit. Don’t pay more than 10% interest on any debt, if you don’t care about your credit score then stay out of debt completely.
4. Save money
Over 20% of your monthly income should go towards savings, open a savings account and start saving money. This is the money that you are not really saving for any purpose, the sole purpose of this money is to be your shield. There are savings accounts that earn as much as 7% interest in South Africa. This money will be used for extreme emergencies, buying a speedboat is not an emergency.
This money is the “freedom” part of financial freedom, you won’t have to worry about a lot of things that are stressing people out. South Africans barely save 5% of their salary, they get loans as soon as there is an emergency. You can use this money to sustain your lifestyle should you lose your main source of income.
5. Cut back on expenses
You can start by making your coffee at home instead of buying it from Starbucks or restaurants. Buy beef patties and make your own burgers, instead of giving your money to fast food franchises. Cutting back on expenses doesn’t mean you should live on pap and spinach. It’s about cutting back on certain things, which won’t dramatically affect your life.
These are simple things like making a lunchbox instead of buying junk food at work. Preserving your food and eating left overs. What about clothing? Cut back on clothing, a lot. We know that clothes are a confidence booster and make you feel good. However, as mentioned earlier, those are just emotions, stop window shopping and thinking of clothes each time you have money.
Try to save money on groceries by comparing prices between different stores before buying. Also keep track of the “miscellaneous”, these are expenses like airtime and junk food. Which can add up to be a lot. If there is something that you can do by yourself, then do it yourself. Fix all the broken things by yourself and grow some veggies if possible.
6. Invest your money
Put around 10 to 15% of your income towards investments. This is what will propel you towards being a millionaire at the very least. You can put more towards investment and become richer quicker if your cash is not tied up in your mortgage. You can invest 50% of your income if you free yourself from paying 50% on mortgage. Your investments will earn you passive income, this is money that will eventually replace your main source of income.
Bottom line
There is nothing more fulfilling than flexing on your haters, showing them that you have made it in life. A lot of the time we do this by buying a lot of materialistic things that we don’t need. These are things that ensure that we are always a few pay checks away from being poor. A lot of people in the middle class have a net worth of less than R150 000 when you deduct their mortgage. It’s because the money is used to buy a lot of things that can’t even be pointed at.
Be smart, use your money wisely, invest it in things that generally have returns. This doesn’t mean that you should be a cheapskate and hoard every cent. Buy yourself nice things once in a while. There is no shame in getting that AMG A45 with the money you earn from your investments.
Conclusion
This was a guide on how to live frugally in South Africa. Do you have any thoughts or questions? Comment below.
