Nickolaus, who is in his 20s, has R50 000 saved and needs to decide what to do with it. “I am toying with the idea of starting up a small business, like a funeral home or perhaps an upholsterer. I do, however, want to consider my options. I have a personal loan that I am paying off, and there is about R38 000 left to pay. Should I even look into buying a small house or flat to rent?”
Maya replies:
The starting point is to sit down and draw up a financial plan so that you understand what your needs are and where you want to be in five years.
Do you want to buy a home? Do you need to buy a car?
Are you currently employed but looking at starting a side business to supplement your income, which can provide you with self-employment one day, or is your plan to start a property portfolio now which can provide a passive income in later years?
These are the things you need to decide on first before you can make an informed decision.
Own business
In terms of starting a business, make sure you understand the industry you are entering well and get advice.
Make sure you have a proper business plan based on thorough research and that your cash-flow projections are realistic. The failure rate for small businesses is very high, mostly because expectations did not match the reality.
Speak to small business specialists like Business Partners or your bank. Both FNB and Nedbank have a strong small-business drive at the moment.
Property
If you decide to buy a rental property, again do your homework. A good website to check out is www.hope.co.za.
For most buy-to-let properties the banks would require a 20% deposit, so based on your savings you would only be able to look at properties worth R250 000, which is very limiting.
However, building up a property portfolio for future passive income can be an excellent retirement strategy. You just need to fully understand the risks and implications.
Debt
The fact that you have quite a high level of debt is problematic. This debt is equivalent to nearly two months of your salary.
You need to make this a priority because you are giving money to the bank that you could be saving. If you want to start a small business, being debt-free is a huge advantage.
An option to consider is to pay off the debt and use the money you were using to pay the debt to rebuild your finances.
I am not sure what interest rate you have on your loan, but based on current credit card rates you are paying at least 18%. If you use your savings to pay off the debt you effectively have an 18% return in your first year due to the saving in interest.
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