Success rarely happens overnight. Financial success, specifically, takes time combined with a set of good financial habits. If you’re working towards financial freedom, there are several routine practices that you can incorporate into your financial life which will help you manage your money more effectively and respond more efficiently to financial challenges.
The average employed 25-year-old who plans to retire at age 65 has 480 pay cheques available to fund for retirement – a life stage which could last for up to 35 years. According to Aristotle, ‘Good habits formed in youth make all the difference’, and this is certainly true when it comes to investing. As soon as you start earning, pay yourself first by investing a portion of your salary into an appropriate investment portfolio. By setting up an investment horizon early on in your career, you are exposing your capital to the power of compound interest for a longer period of time. Delaying your investment journey by even a few years can have a significant impact on how much you will need to invest as a proportion of your income, meaning that the longer you delay, the more difficult it will be to play catch-up. Investing early and consistently is something that your future self will thank you for.
Food for thought: ‘The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind.’ (Thornton T. Munger)
Have financial goals that support your lifestyle
Establish a set of realistic goals for your life and then develop a financial plan that can help you achieve them. While you may have a head full of ideas and dreams, writing your goals down can be a powerful way of committing to them and holding yourself accountable for the achievement thereof. Both your goals and your financial plan should be reviewed regularly as and when your personal circumstances change. Ideally, your financial advisor should develop a documented, visual plan that clearly sets out the steps required to achieve your goals, and each meeting thereafter should include a progress report that measures your successes (or failures), amongst other things.
Food for thought: ‘People are not lazy. They simply have impotent goals—that is, goals that do not inspire them.’ (Tony Robbins)
Protect your risk
During your accumulation years (i.e. while you are still acquiring wealth), it is important to protect yourself adequately against the risk of death, disability or severe illness. Remember, your future wealth depends on your ability to generate an income, and even a temporary interruption in earnings can set you back financially. Ideally, seek expert advice from an independent financial advisor who can help quantify the amount of cover you need and steer you towards a reputable insurer with a reliable claims-paying track record. Remember, long-term insurance is risk-rated meaning that your cover will be more cost-effective when you are young and healthy, so don’t procrastinate. Any medical condition or illness that you develop in the interim can affect your underwriting and ultimately your premium, so get cover as soon as possible. Further, keep a firm handle on your cover to ensure that it remains aligned with your personal needs as and when your circumstances change. Reviewing and adjusting your long-term insurance cover should be a standard item on the agenda when you meet with your financial planner.
Food for thought: ‘You can never protect yourself 100%. What you do is protect yourself as much as possible and mitigate risk to an acceptable degree. You can never remove all the risk.’ (Kevin Mitnick)
Manage your debt responsibly
While debt may be unavoidable, managing it responsibly is not. Managing your debt well and keeping it at a controllable level is an investment in your future self as it will not only enhance your credit score but place you in a position to obtain more favourable financing terms if you want to take a home loan in future. Avoid taking out too many lines of credit and rather consolidate your short-term debt through a single credit facility. Too many credit cards and retail accounts can adversely affect your credit score and make it more difficult to keep track of repayments and interest-free periods. Ensure that you timeously repay more than the minimum amount each month and adhere to a debt reduction plan so that you can eliminate your short-term, high-cost debt as quickly as possible. With identity theft being rife, keep a close eye on your credit score to ensure that it has not been impacted by fraudulent activity. Remember, burying your head in the sand is not a debt reduction strategy. Eliminating your debt takes time, commitment and intentional management.
Food for thought: ‘Debt is the slavery of the free.’ (Publilius Syrus)
Spend less than you earn
Bringing your expenditure below your level of earnings is easier said than done. That said, the only way to build wealth is to ensure that you have a consistent ‘profit margin’ in your monthly budget that you can channel towards investing for the future. Finding space in your budget to invest (i.e. paying yourself first) is likely to involve some soul-searching in terms of what is most important to you. In a world where we can have anything but not everything, budgeting boils down to deciding what you want now versus what you want most. Once you’ve prepared a realistic budget, commit to reviewing it regularly and tracking your expenditure to ensure that your expenditure remains contained.
Food for thought: ‘There is no dignity quite so impressive, and no one independence quite so important, as living within your means.’ (Calvin Coolidge)
Plan for the unexpected
While it’s impossible to plan for all of life’s eventualities, your personal circumstances should give you insight into the type of things that could go wrong and potentially come with a high price tag. A sick pet, burst geyser, dinged vehicle, broken home appliance, temporary loss of income, retrenchment, medical expenses not covered by medical aid, a blown-out car tyre – these are all potential eventualities that can befall the average person and which, in the absence of an emergency fund, can set one back financially. Again, your personal circumstances will help determine how much emergency capital you need. For instance, you may already have protection in the form of pet insurance, short-term insurance, gap cover, and income protection, so do an assessment of your particular needs and then fund accordingly. When reviewing your financial plan, don’t forget to check that your cash cushion remains aligned with your circumstances to the extent that they may have changed over the course of the last 12 months.
Food for thought: ‘Because you never know when the day before is the day before. Prepare for tomorrow.’ (Bobby Akart)
Be tax efficient
Taxpayers are afforded several ways to reduce their tax liabilities, and it is advisable to employ these mechanisms to your benefit. Leaving ‘free money’ on the table doesn’t make financial sense so be sure that tax planning forms part of your overall financial plan. While contributing tax-free towards an approved retirement fund is one of the most obvious tax deductions worth taking advantage of, your advisor should be able to guide you on how best to structure your portfolio in the most tax-efficient manner. Remember, tax planning is an ongoing exercise and not a once-off project, so be sure to revisit your tax planning regularly.
Food for thought: ‘The hardest thing to understand in the world is income tax.’ (Albert Einstein)
The role of human emotions in the context of financial planning should never be underestimated. Behavioural finance is a very well-researched area of human psychology – and one of the key roles played by a financial advisor is that of sounding board for all future financial decisions. Volatility in the investment markets as a result of political or economic turmoil can create speculators out of even the most cautious investor. Fear and greed are the greatest drivers of impulsive financial decisions, and it is during these times that a financial advisor can plan an important role in maintaining composure. If you’re invested for the long term, make a habit of reminding yourself to ignore market volatility. Remember, market fluctuations are the nature of the beast. Avoid watching the market during a downturn, but ensure that you’re invested for the recovery – because it will recover.
Food for thought: Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas. (Paul Samuelson)
Look after your health
Taking care of your health is one of the best investments you can make for your future self – physically, emotionally and financially. To ensure that you have access to the best possible medical care, ensure membership of a reputable, comprehensive medical aid scheme, and consider putting gap cover in place to help fund those service provider costs in excess of medical aid tariff. Many diseases and chronic conditions are lifestyle-related and can end up costing enormous amounts in care, treatment and loss of income. Obesity, Diabetes Type II, strokes, heart disease, some cancers, chronic obstructive pulmonary disease, and Cirrhosis are examples of diseases that can be caused by poor lifestyle choices, so educate yourself, stay covered and stay healthy.
Food for thought: ‘It is health that is real wealth and not pieces of gold and silver.’ (Mahatma Gandhi)
Regardless of whether you have a natural affinity for or interest in finance, as a taxpayer and investor, it makes sense to keep up-to-date with financial affairs. Very often, people make poor financial decisions because they simply didn’t know what they didn’t know. While your independent advisor should keep you updated on matters relating to your financial position, it’s important to take responsibility for your ongoing financial education. Find a reputable, online financial publication and commit to reading at least one financial planning article every week.
Food for thought: ‘Knowledge is of no value unless you put it to practice.’ (Anton Chekov)
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