REACHING FINANCIAL INDEPENDENCE

The right way to go about reaching financial independence for me was only through understanding my “WHY”. For me, it is to be able to take control of my life. I don’t want to stay in the job that I don’t want because I have to. That's why we chose to owe no one anything but love, and it works wonders for us. We worked hard and sacrificed fancy material stuff earlier on to leave an inheritance for our children and started building our own tools to give to the poor. I have a small scholarship to give other people's kids a solid high quality education. This is all based on the wisdom found in the Proverbs.

Reaching Financial Independence - image

Establish your own WHY and shape your life to respond to it.

What is Financial Independence?
“Financial independence is a term generally used to describe the state of having sufficient personal wealth to live, without having to work actively for basic necessities. For financially independent people, their assets generate income that is greater than their expenses.” Wikipaedia

A high salary doesn't count, unless it is used to acquire assets that make more money. It is all about asset ownership. Assets are what enable us to create jobs, reach out to the poor, and have control over our time. A job is not a permanent solution to one's financial woes. You may lose your job in an instant. It is much wiser to get R500,000 per year from an asset than R1Million from a job because your asset is likely to be with you and your children and if well taken care of, with your children's grandchildren.

Measuring your Way to Reaching Financial Independence
Financial independence is about the ability to live comfortably without needing a job. To measure your wealth, think about the number of years you can manage without your next salary. If you are able to cover all your expenses without a monthly salary, congratulations, you have arrived. There are two ways of doing this

You either boost your income or lower your monthly expenses. The easiest is lowering expenses. This is not easy, but it is very possible. In just over 10 years of us working towards this with only our salaries, we reached the point where we can do without our jobs in an unfortunate event of us losing them. We managed to collect assets that earn us a stable income that covers more than just our basic expenses. This is how we did that:

Real Estate
Most of our monthly income is from our rental properties. These alone can cover our current basic needs. It is definitely not easy collecting assets like property in South Africa. Don't be intimidated, however. Push harder, save like crazy, and start your own wealth building journey. We also paid up all our properties by investing the rental income back into the mortgages/ homeloans. It was worth it. Without a homeloan currently, that means lower monthly expenses.

Living Below your Means
It's a no brainer, earning R20,000 and having your living expenses at R20,000 is doing your retirement plan disservice. Most of us spend more than we earn. In some instances, a beggar in the street with R500 net worth is doing far better. Living on 50% of your income is a general rule of thumb. I know couples that live on one salary. Earlier on, we invested about half of our income in real estate and lived on the other 50%. That was not very easy but with time it was automatic. Even the 50% was a lot. I suspect that we will do even better than this. I think living on 40% in our current financial state is attainable.

Paying yourself First
It has been mentioned over and over again but the concept of paying yourself first will never get out of fashion. I am guilty of loving nice clothes, shoes and bags. Most people don't know how badly I love nice stuff including nice cars. I go to an extent of reading car magazines. I love cars. But I obviously can't own everything I love now, can I? The fact that I know I can afford them and will eventually own the one I really love is enough to keep me going. I just think a car installment would pain me at the moment. I doubt if I will ever be OK with it. So I try to hold my horses and keep pushing my old car. In the meantime, I'll keep investing in my car fund until its overgrown.

I've been trying to quicken our way to reaching financial independence through this method for a while now. What works for me is transferring the money immediately it reaches my account into my investment accounts. Part goes to stocks, part to property when I have a mortgage, part to my money market account, etc. Its only after this that I start spending the remainder. After spending on all the basics, I make it a point I get my monthly facial and massage. Even with spending 50% and below, I manage to sneak in my beauty spa visit. It is very important for my sanity.

Interest, Stocks and Dividends
Our emergency fund obviously gets some interest of just below 5% in the current low interest rates. The stocks we have earn us some growth and dividends. These are very small amounts but every little bit counts. I must add that with diversifying in mind, all our rental income goes to stocks now.

Side Income
I have a small income from my online writings. This alone can pay for my son's school. I am grateful for this very small amount of money. Especially because I love writing and I only do it about once a week currently. I am too busy with a lot of stuff in my life at the moment. I would prefer more writing.

I also want to sell stuff online at a comfortable pace. I will stock things I love to collect and re-sell them. That includes antiques and art.

How about you? Is there any thing you are currently doing to fast track reaching financial independence?

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ASSETS ARE FOR INCOME

Indeed, assets are for income. My friend visited last night to drop her son who had a sleep over with my boy. This girl inspires me so so much. She drives an old car and is very busy. She left her posh job to work on her consulting business. When that was slow she started a catering business, which delivers dinners to people’s homes. She has different menus from Monday to Friday. She later added take away lunches.

assets are for income

Last time we had coffee which stretched up to lunch and late afternoon snack, we talked about business. She was quite busy renovating and extending her house at the time. So yesterday she mentioned that her house is now too big for them and she decided to rent it out. Her prospective tenant is a business that will live in the first floor and operate in the ground floor of the house. My friend will get R50,000 in rental and has found a home for her family in a nice neighbourhood. She will be paying R8,000 per month for the smaller house. Off course she is still busy with the lunch/ dinner delivery business and is moving on to build another commercial property in the neighbouring town.

She says, when her friends were buying nice cars, she was busy buying land. I can totally relate. She has hectares and hectares of land in various cities, land by the ocean, land in tourist attraction areas, land for commercial property, etc. She has started with her second construction project. I was totally humbled by her zeal and courage. Something about girls like this (who drive very old cars and work hard) inspires me. When she started renovating her house, it was for her own comfort. Off course she later wondered why she had such underutilised asset. Assets are assets because of their potential to earn money, right? YES, assets are for income. That’s why a house you live in doesn’t add much to your wealth. Even if you sell it, you will still need to buy or rent a home.

I wish I didn’t love huge spaces the way that I do. What I take from my smart friend is that, you can delay the luxury a bit whilst you start collecting assets. Most people have confidently judged the frugal saying “you need to live a little”. The same people who “live a little too large” are not sleeping at night thinking about the tricks to carve their way out of paying debt. A wise man told me that we are only in the 1%, which means, the 99 percent of the people don’t get this. I don’t know about you but I love being in the 1%. This story is so similar to one of my friend in Namibia. I will ask her to narrate it herself. She quit her job and is now a real estate businesswoman I have come to respect. I am so blessed to be surrounded by such girls in my life.

This makes me think because, like I mentioned in my previous posts, we are searching for our next home. We are a family that loves space. I am thinking very hard about this. What about you dear friend? Do you believe that Assets are for Income? Would you let your home for rental and downgrade? Would you move to a smaller town to cut the costs?

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HOW TO PAY A HOMELOAN QUICKER

I promised to write on how to pay a homeloan quicker in the post on how to consolidate debt using a mortgage yesterday. This is part of our Dealing with Debt series. This is kind of how we paid our last bond and the previous six quick. I know, I know, I am contradicting myself here, but if you are not in the business of property, you are better off in a paid up house. Debt is draining.

HOW TO PAY A HOMELOAN QUICKER

We are now searching for a house AGAIN. Our previous home is now a rental property. The challenge that I have is that, I have quite a bit of stuff that needs space. I have exercise equipment that are now too much for the place. Don't ask if I use them regularly or not please. But in my case, I feel having them stops me from signing another gym contract. I used to have a gym contract all the time, until I decided to buy my own equipment. Anyway, back to our topic on "how to pay a homeloan quicker".

Most of our homeloans in South Africa are a standard 20 years. Mine was 30 years, other people choose a 15 year term. Those terms mean nothing but the maximum term because we are lucky to never be restricted to that term. We sign those terms and decide if we really want to stick to the term or shorten it. I will make an example using a R500,000 house like our yesterday example. It's much easier to follow the logic of figures when you have calculations in front of you.

Make Monthly Extra Payments
Even a R100 extra in your homeloan makes a huge difference. I will use R500 and R1000 in my examples.
R500,000 homeloan; at current 8.5% prime rate; 20 year term
You pay R500 extra every month and pay your bond up in 15.5 years. You see how R500 sheds 5 years off your repayments. If you pay R1000 extra you'll pay your bond in just below 13 years. Remember yesterday we worked on R2000, which results in paying up your loan in less than 10 years. If your bond is R1Million, you may just double the figures. Extra payments are worth that sacrifice.

Pay your Bonus to Homeloan
Those who have a 13th cheque in their jobs can put most or all of it into the homeloan. Lets say instead of the R1000 per month, you put the R12,000 once every year into the bond. You will end up paying your bond in 13 years or so. This is what I did, on top of monthly extra payments. I paid my first property in 4 years. It was very tough to do that, but the income from renting it out later was SWEET.

Refinance and Negotiate Interest Rates
Most people never negotiate anything with their banks. Its time you start. If you have a clean credit record you may go see them and ask that they lower your interest rate after a few years. The worst case scenario is them refusing. If they do refuse, you can always switch to a bank that is interested to your business at a lower rate. Lets say you get 1% rate cut. This lowers your payments by more than R300. If you pay that R300 back to the bond, you shave 3 years off your bond. Can you see how even that little helps?

There is more tricks and tips on how to pay a homeloan quicker. These are the simpler methods.

Other articles on Dealing with Debt series:
Paying up your Debt
Paying your Debt using your Homeloan

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PAYING DEBT USING A HOMELOAN

Try paying debt using a homeloan if you are disciplined enough. This is the second installment on my series on Dealing with Debt which I started yesterday. I have used an existing homeloan to pay up debt. We paid Mr's car using our mortgage once. It was a great move and saved us a lot of money in interest. The best part of this move was that, we paid the original car installment into the bond and ended up paying the loan in a fraction of the time.

PAYING DEBT USING A HOMELOAN

 One amazing tool that people neglect is their homeloan. Your mortgage is likely charged at a prime lending interest rate and most likely below prime rate. Whilst other debts are above prime rate. Credit card and store cards can be above 20%, a car and personal loans closer to 20%. Remember that prime interest rate is 8.5% currently.

This is all a figures game which your bank plays too well. If you can pay below prime for your debts, why not. If you have a homeloan that you've had for a while and the value of your home has gone up, you can have the bank give you an access bond. You can even ask for a lower interest rate whilst at it. Or even change banks to get a lower rate, but that's the story for tomorrow. The bank may increase your homeloan to the current value of the house so you can access the extra cash in it. Like I said yesterday THIS IS FOR VERY DISCIPLINED PEOPLE because you are now starting another 20 years of loan.

Lets use a "paying debt using a homeloan" example:
Lets assume you owe R50000 in the combination of your debts (consumer debt, credit cards, personal loans, etc). The average rate for all of them is 20%. You pay about R2000 per month to service this debt. R500 here, R300 there, etc. At that 20% interest rate you will take about 33 months to pay all that debt (hope my spreadsheet is accurate). That's almost 3 years of parting with R2000.

An alternative is getting the access bond on your house and pay all your debt. And then, pay the R2000 extra into the homeloan. Remember that your bond payment may increase, though unlikely if you had it for a while. But you will pay the R2000 extra into the homeloan, because that's the R2000 that you would be throwing in the water anyway.

Assuming that the house is worth R500,000 at 8.5%, then your monthly installment is R4,339.12. You'll pay your mortgage in 20 years and part with a total of R1,041,388 in that period. At least your income will be increasing over time hopefully.

Now add the R2000 to the equation. Paying R2000 to your homeloan can save you more than half the interest you will pay over the term of your loan. You end up paying your homeloan in 9.5 years instead of 20. And then part with R 734,675 instead of R 1,041,388. Paying a homeloan quicker can be so sweet and effortless.

See how you can use the R2000 that you throw into the bin all these years. Debt will ALWAYS be an enemy, unless you use it to get income. What do you think of this concept of paying debt using a homeloan?

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DEALING WITH DEBT

I decided to start a series on Dealing with Debt, because of questions I get lately. There are two very popular ways of paying debt.

DEALING WITH DEBT

Firstly, you have to list ALL your debt with interest rates charged. Credit cards, personal loans, store cards, car loans, etc. You have to know the interest rates you are charged in each account. The rates will be in your account statements.

NB: You are not buying any clothes, not dining out, not going on holidays, not buying lunch or coffee, not indulging on luxuries whatsoever for a few months at least. You are not going to die, I promise. It took me and hubby and our kids at least 10 years to take our first proper holiday outside family visits. We now go on a holiday all the time.

For ease of this demonstration I will give an example of a hypothetical case:
Edgars R1000 (R200 minimum payment required), Woolworths R3000 (R400 minimum payment), then credit card R5000 (R600 minimum payment), then personal loan R15,000 (R800), then your car R120,000, etc.

The Snowball Method: Made popular by Dave Ramsey. It is not a smart way but most people stick to it. It’s more psychological than cheap/ smart. One pays the smallest debt first.

Pay minimum required by all the companies you owe and whatever money you have left before luxuries like restaurants and buying the next pair of shoes, goes to the Edgars account. OK, say you manage to have R300 left (after paying the R200 instalment). You pay the R200+R300 and in 2 months you are done with Edgars.

Next is Woolworths. Remember you now have the R500 extra, which was going to Edgars in the past two months. You continue paying the minimum you had to pay to all accounts. Pay the R400 instalment to Woolworths and then add that extra R500. You will be done with the Woolworths account in probably 4 months. That’s 6 months of no luxuries...it’s so possible and EASY. By this time you WON’T want those luxuries anymore, but if you want them so badly you may take a small amount and go out for a cheap meal, but absolutely no holiday and no new clothes, no furniture and Edgars and Woolworths cards are cut into pieces and thrown in the bin.

Now you have an extra R900 which was previously going to Edgars and Woolies. Pay that to the credit card adding to minimum required (R600). In a short 4 months you will be out of the credit card debt. And sitting with an extra R1500 (Edgars, Woolies, Credit Card). You’ll probably finish your personal loan in another 10 months or less. You do this until you are free of the consumer debt.

The cheaper way to pay debt: You save on interest
Same as above but instead of small debt you start with the HIGHEST interest rate debt first. Leave the car out and deal with all your consumer debt first. Cars are too expensive in South Africa. Then attack that car loan if you want out of that too. But you will also need to build some emergency fund in the process.

Next, we will look at how you can use your homeloan to pay up debt. Probably the cheapest way of dealing with debt if one can. That one is for disciplined people.

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WHERE TO SAVE MONEY

A reader asked me:

"Do you have any advice on where to save money and get good interest?"

It depends on how much money we are talking about and what the money is for. There are a number of facilities and tools in South Africa that help one earn high interest.

1. I would put a small amount that I might need for an emergency in a Money Market account. I wrote about the money market accounts here... Money market accounts are relatively low interest but it is risk free, you can't lose any of your money. All banks have a money market account about 4-5% interest at the current low interest rates. I promise you, you will struggle to get that in the developed countries.
2. I would put money I don’t necessarily need for the medium to long term in the Index Fund like satrix. See my demonstration on satrix here... There is some risk as the money is in the stock exchange. So you may lose your money. Its unlikely and has never happened in the medium term. Your money is available when you need it. It depends on the fund you choose but a fund like SatrixIndi has managed more than 30% per year in the past few years and about 40% in growth in some of the years. That is a lot of growth.
3. I would go riskier and buy into individual companies in the stock exchange if I have a sizeable amount. Remember you can lose the money in the stock exchange. You also need to know what you are doing to invest by yourself. It is possible but takes time and education (reading and listening). So if you are not clued up, get experts or even better stick to an index fund.
4. If you have a huge sum of money and you are like in your 40s-50s, think about bonds. Interest is not bad but your money is locked for a specific number of years like 3 or 5 years. Why did I mention the age? The bonds are completely safe. I think when you are younger, you can afford a little risk in your life because you have time to recover what you lost. 

 For a balanced portfolio you need a bit of each of the tools listed above, plus other assets like Gold, property, etc. I just cannot give advise on where to save money without knowing your specific situation. Especially not knowing what the money is for. Feel free to ask more questions using the comment form below.

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DECEASED ESTATE TRANSACTION

Back in October 2012 I wrote about my deceased estate transaction. Only yesterday, I emailed the lawyers that I have lost interest in the deal. Who can blame me. I started this investment process in September 2012 and its now almost August 2013. The lawyers mentioned the challenge they have with the wrong municipal bill amounts and their difficulties rectifying them.

my deceased estate transaction

Anyway, I just got an email from a reader by the name of Jason.

"do you have a continuation on your story? email it to me."

I will email Jason. In any case, this is the story:
Lawyers did their long tango dance. Like I mentioned in my initial post, I was not going to be bothered by how long this transaction takes. The problem I have now is the fact that this project is still outstanding. Something about an incomplete project drains the energy out of me. I feel so drained each time I think of it. Can I be blamed? Its almost a year, anyone would be bound to crack, right?

This is my second try at the deceased estate transaction, and the experience is similar to the first one. I don't know if I will try my hands in the third one. Never say never though. I will wait to hear from the lawyers tomorrow. I feel relieved already. The seller (daughter of the deceased) is the one who kept me hoping. We finally got introduced, talked on whatsapp and facebook. And then I got my emotions entangled because I was all of a sudden dealing with someone I thought I knew. So I hung in there. I don't know if holding on to this deal was a great thing. If I cut my losses earlier, I would have moved on to another deal, I suspect. That may have ended up being a good or bad thing, depending on the deal I go to. Now that I couldn't go to another deal, I managed to focus more on the stocks. I feel its been a great move.

There it is folks. My deceased estate transaction seems to have fallen through again. Thanks for asking Jason.
If you also have a question/ request for me, feel free to leave me a note by filling the form at the Contact Page. No one will see your details. I love responding to emails.

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Monthly Spending and Budget Report-June 2013

To those new in this blog, This is my personal finance journal where I track my monthly spending. My goal for 2013 is to spend 60% and invest 40% of our income to help me (and hubby) to retire comfortably in our early 40s.

I spent a few months renovating one duplex. It took long because we it is not available to let anyway for another few months. Last month (May) we managed to live on 21% of our income. We hit a small ditch in June with 52% of income in expenditure. We are still smiling from ear to ear for having paid up our last mortgage.

Our June 2013 monthly spending and budget report:

INCOME	JUN'13	MAY'13	NOTES
Real Estate	33%	9%	Target is 25%, GREAT .
Personal Income	46%	86%	We are working on growing other income streams to bring this lower.
Interest/ Dividends	2%	1%	Our emergency fund interest.
Online Income	19%	5%
Other	0%	0%

Interest on my Emergency Fund is 4.65%, which is below the inflation rate.

SPENDING	JUN	MAY	NOTES
Real Estate	34%	10%	Still due to renovations.
Transportation	0%	0%
Online	0%	0%
Internet/ Phones	1%	1%
Consumer	4%	4%	Includes food
Credit Card, Cash & Fees	0%	2%
Giving	7%	3%	This should be at around 10-12%. It will even out during the scholarship payment months.
Life Insurance	1%	1%	Fixed
Invested	48%	79%	We paid most of it into the stocks. I no longer top my Just Invest (Nedbank) savings up.

We lived on just above 50% of our income in June (comparing to 20% in May). Our Net Worth impressively well.

TRACKING 2013 GOAL PROGRESS

1. MAIN GOAL: net worth growth by at least 25%.-- 23% so far.
2. BUDGETING: invest at least 40% of income.-- 50.8% so far.  
3. EMERGENCY FUND: 3 months worth of living expenses.-- DONE.
4. GIVING: give of more than 10% of income.--5% so far.
5. REAL ESTATE: Construct at least 4 flats/ increase the rental income by 30% .-- not yet.
6. MORTGAGE: Pay up our home .-- DONE.
7. STOCKS AND DIVIDENDS: Get at least R12,000 in dividends.-- not yet.
8. EXTRA INCOME: Online income to R8000 per month by December 2013.-- +/-R3700 April.

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AGAINST PAYING UP A HOMELOAN

For someone who has done some post graduate qualification in real estate investing, I kind of suck at applying some basic principles in property investing. Here's the thing: the Mr and I are not fond of owing anyone including the bank. So naturally we have always put the majority of our income into paying up some property. It sounds amazing but at some common sense level it is stupid. Why on earth do we throw money in the "air" sort of, over and over again. This is my take on and against paying up a homeloan:

against paying up a homeloan

Seriously, the only advantage of property investing is LEVERAGE. I don't know any financially sound reason why someone with "cash in hand" would choose to buy and fully own a property right away. Forget that I wrote about paying up my own homeloan here, here, and here. And contradicted my original and sober position against paying up a homeloan. We did end up paying up our last homeloan in June 2013 which is exciting. But this is not really a great/ advisable move, but a "PEACE OF MIND" kind of a move. We do hate debt and are happier without.

NB: If you are not particularly good with your finances, paying up your homeloan is probably your best option. The paragraphs below are for people who would invest the money that would have been extra payments on their mortgage.

A homeloan is sort of risk diversification. Think about it, you own only part of your home and the bank owns the rest. Recently a SISA reader was scared of the state of affairs in the country and its impact on investing in property. Leverage is a great solution to that fear in my opinion. For 20 to 30 years, you are a co-owner of your property.  Should something go bad in the sector, you have only part of the investment to worry about. What bothers me with the property ownership is its lack of liquidity. You will always have a lag in your actions. But I am grateful for investing in property at the time that we did. Its the best place to start investing... at least for us it was.

In our last case for instance, we paid up our 30 year homeloan in 6 years. We saved hundreds of thousands of rands in interest. That is great right! The interest rates we last paid were 6.9% per year. That's how much we are now saving by being mortgage free. Think of what the same amount (extra payments to bond) would have achieved in our retirement accounts. Our mortgage was from January 2007. We established that we saved between 8 and 10%, because our interest rates are not fixed. I wont invest anytime in calculating the actual amount, so lets say we saved 9% in interest.

Now lets look at a completely passive return on investment we forfeited. If we went the SATRIX route (because we were clueless on individual stocks at the time, and had two satrix accounts). It seems I can only get up to 5 years charts in their website.

SATRIX vs PAYING UP A HOMELOAN

Oh well Satrix FINI managed to get a whooping 17.7% per year in the 5 years whilst INDI got 30.8% per year. This is what we would have achieved by skipping the mortgage payment and focusing on investing in one of the two satrix investment accounts.

Well since we didn't go with the profitable plan, we are still appreciating the fact that we won't pay any mortgage this month. I think we will go on a mini holiday using that money. Something a bit out of character and extravagant. And then go get a much cheaper access bond on that account and withdraw it to try and invest it wisely. And maybe this family will let me use some of it to buy me a nicer car seeing that my car fund is not ready yet and our other car is in a "please replace me" state.

Whats your take on and against paying up a homeloan?
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WE GOT A PERSONAL LOAN

Yes, you read right, we got a personal loan for a week or so. I don't ever want to be in a tight corner that we found ourselves in about two weeks ago. We needed money within 24 hours. Our emergency fund is in the 24 hour notice just invest account. We were out of the country and therefore counldnt access the money that belongs to us. What a stressful two days we had.

how we got a personal loan

 We tried to look at our other options. We have an access bond in one of our rental properties. We have used this account before. The Mr calls his bank relationship manager. And banks being banks, they say nope, we cant access our money. Reason being that we need to submit insurance papers, etc. This was never a requirement before. And this property is a sectional title townhouse.

We were stuck in that kind of rut. We couldnt use the money in our emergency fund account and we couldnt use the money in our access bond. As the Mr and bank relationship manager were exchanging calls, the guy mentioned a personal loan. We never think of such expensive solutions, honestly. More than R100k in personal loans is just too scary, but this was our only option. That's how we got a personal loan.

I never knew that one can apply for a personal loan so easily and get approved so quick. In a few hours of faxing the forms we were approved. It this even legal? Reading 13.5% per month in interest nearly gave me a heart attack. Imagine how paying 17%, 21%, etc in credit card debt feels. I would live in eternal guilt and self condemnation. If you have credit card and/or any consumer debt, do yourself and your family a favour by paying them up very fast.

Fast forward to a few days, up to a week later. We then manage to get the funds to pay up the loan. Guess what it did cost us... more than a thousand rands. This is for a few days of us having the R150k in our possession. Remember that I have just above R300,000 in the emergency fund. At 4.65% per month, I get below R1300 per month in interest. That's more like what R150,000 cost me in a week. Banks are not stupid, I want to own one... one can dream right. I guess buying bank stocks counts as part ownership, right?

I don't regret our decision to get a personal loan. How about you? What would you have done?

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