If you pay the first instalment of your mortgage bond on the day your bond is registered, you can save tens of thousands of rands, Paul Leonard says.
For example, if you are granted a mortgage bond of R100 000 at an interest rate of 13 percent over a 20-year repayment period, the monthly instalments will be R1 171, Leonard says.
If you pay your first instalment at the end of the first month in which the bond is registered, the interest portion will be R1 083 and only R88 will come off the principal debt.
However, if you pay the first instalment on the day the mortgage bond is registered, the entire R1 171 will be deducted from the principal debt because no interest has been charged yet.
Leonard says if you make your first repayment at the end of the first month of having your home loan, it will normally take you 12 months before you have paid off R1 171 from the principal debt.
If you pay the first instalment on the day the bond is registered, you will cut 12 months from the repayment period. Those 12 months will save you R14 052 (12 multiplied by R1 171) for every R100 000 of your mortgage bond.
If you have a bond of R500 000, you will save just over R70 000 by paying the first instalment on the day the bond is registered.
Leonard says that although many South Africans have a large amount of hire purchase, credit card and/or store card debt, only a few South Africans use debt wisely to save money - as illustrated by the above example - or even to make money.
One of the main reasons South Africans have a low level of savings is that they spend much of their income on debt repayments.
On average, they spend more than 50 percent of their take-home pay on repaying debt. For example, if your after-tax, take-home income is R20 000, it is likely that more than R10 000 of this amount is being used to repay debt.
Leonard says one of the reasons for this is that people do not delay gratification - in other words, they do not wait until they have saved enough money to buy a desired item. The ability to take out a loan and buy the item immediately exacerbates this tendency of not saving.
Most people do not have savings goals, he says, and so they do not have a compelling reason to resist the barrage of advertisements trying to tell them what they should own, wear and drive.
Leonard says it is important that you avoid expensive bad debt and use good debt to help create wealth. The type of debt you should avoid is that accumulated on consumption (for example, hire purchase agreements for furniture and appliances, borrowing money for holidays and luxuries, and cash loans). A better way to purchase these items is to save and buy them using cash.
Leonard says you will have to give up some short- to medium-term pleasure to start the investment process.
Having a clear goal and mapping out a plan to achieve that goal will help you to build the discipline you need, he says.
"Okay debt" is debt used to purchase big-ticket items, such as houses and cars.
Few people are able to purchase these items for cash, so most of us will have to incur debt at some point in our lives, Leonard says.
It is not the case that you should never have debt, he says. Rather, it is how you manage the debt, and the size of that debt that determines whether or not you will get into financial trouble.
In order to save on interest, you should ideally settle your debt in less time than the banks' recommended repayment period, he says.
Leonard also outlined the basics of gearing and how to use other people's money to become financially independent.
The two main forms of gearing are gearing time and gearing money. When you gear time, you make more effective use of your time by employing other people to help you. This is what businesses typically do.
For example, Leonard says, if you have a garden service and you mow all the lawns yourself, the number of gardens you can service each day is limited to the number of lawns you can mow in a working day. However, if you buy three more lawnmowers and employ three people to push those lawnmowers, you would benefit by being able to do the equivalent of three days' work in one day.
When you gear money, you increase the amount of money from which you benefit by using other people's money.
Leonard provided the following example to illustrate how you can benefit by gearing money: if you invest R100 000 in a diversified portfolio that grows at eight percent a year, the investment will be worth about R215 000 after 10 years.
Another option would be to use that R100 000 as a 50-percent deposit on a property. A 20-year mortgage bond (at an interest rate of 13 percent) could fund the balance of the purchase, and rental income earned from the property could cover the bond instalments.
If the property grows in value by eight percent a year, it would be worth R431 000 after 10 years. Once you subtract the value of the mortgage bond, your investment will be worth R352 000.
Leonard says although in both cases you invested R100 000 at a rate of eight percent a year, when you borrowed money to buy the property or geared your investment, you made R137 000 more after 10 years than if you had invested the money in the diversified portfolio. This is because you benefited from the growth on the bank's money.
You must, however, be careful with gearing, Leonard says, because although it can multiply your gains, it can also multiply your losses.
Using gearing to purchase a second property to rent out is a useful technique if it forms part of your wealth accumulation strategy. Any middle-class South African has the potential to do this, Leonard says.
However, Leonard warns homeowners about investing in a second property. Cash flow is a key to successfully using gearing as a strategy. Always ensure you can still afford the instalments if your tenants default or if you have problems finding tenants. For example, could you afford to service the mortgage bond if your rental property stood empty for two or three months?
Leonard says gearing by investing in a second property is especially useful to people who have started saving for retirement too late in life and would like to boost their retirement nest-egg by using other people's money in order to supplement the income they will earn.
Again you need to be cautious because a geared investment that goes bad when your finances are already inadequate for your retirement needs can exacerbate your situation.
There is a significant do-it-yourself component to using gearing in this way, at least in the early stages, he says.
If you buy property, for instance, you will need to do your homework to ensure it has the potential to grow in value. You will also need to arrange the financing and perhaps find the first tenant. Later on, you could employ an agency to manage the tenants for you.
But before you think about using other people's money to make money, devise a plan to save your own money.
Leonard says you can easily spend R2 million on interest over 20 years. For example, take a middle-class couple with a combined income of R25 000 a month. Statistics show that typically more than half of this income will be used to service debt. A large proportion of the debt is likely to be the couple's mortgage bond.
But many South Africans also have a lot of consumer debt, such as hire purchase agreements and clothing accounts.
If you add up the interest charges on the consumer and mortgage bond debt, it can easily total more than R2 million over 20 years, he says. This represents a significant portion of your time and energy.
If you defer gratification and save up to buy for cash (or at least save for a larger deposit), you can reduce the interest charges and your money will go further, he says.