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Your top 5 financial New Year’s resolutions

Tis the season, and I’m feeling generous – I’ve worked out your top 5 financial New Year’s Resolutions for you! All you need to do is print them out, and, of course, stick to them.

1. Pay down your debt

This is the most important thing you can do for your financial health. I’m serious. With interest rates where they are, your chances of earning more on your investments than you’re paying on your debts are really slim. So the smart money should go towards paying down that debt as quick as you can. The only debt you should carry is a home loan (and even that isn’t ideal!)

Because paying down debt can be a rough thing to do, emotionally, I like Dave Ramsey’s debt snowball method for doing it. Instead of paying the highest interest rate debt off first, which is what best practice suggests you should do, debt snowballing means paying off your smallest debts first. Doing this gives you, in my experience, an unrivalled emotional booster, and makes paying off the next debt feel much easier.

2. Save 10% more than you think you can

I assume you’re already saving – if you aren’t, make it your goal to start saving at least 10% of your income every month, ideally in a tax-favourable vehicle like a pension or provident fund, or a retirement annuity. If you already a decent saver, however, then challenge yourself to save just 10% more this year. If you save 10% of your income, shoot for 11%, if you save 15%, shoot for 16.5%.

This may sound like a silly goal, but try it. Increasing your savings by even a small amount can do fabulous things for your long-term assets thanks to the power of compound interest. And adding 10c to every rand you save is not too onerous – you can cut your spending in a million different ways, from taking lunch to work to skipping your daily fancy latte. Try it.

 3.  Take the emotion out of it

This is more of a long-term goal, I know. But when it comes to saving and investing, getting emotional is the number one killer of good financial planning. Panic, fear, greed – all of these can make you abandon a solid, sensible plan in a flash.

Overcoming this is very difficult. The first step is recognising that your emotions play a role in your investment decisions, and planning for that eventuality. You could, for example, make it a rule that you cannot make a major trade without talking to your spouse or your financial planner first. You could force yourself to wait three hours before making a change to your financial plan, and spend that time reviewing your plan and analysing why you want to make the change. There are plenty of tricks you can use to reduce the impact that emotions have on your investment behaviour provided you take the time to prepare yourself.

4.  Diversify

As I’ve discussed before, failure to diversify is one of the main causes of underwhelming portfolio returns. Spreading your investments across a range of asset classes is one of the best ways we know of to smooth your returns over time, to preserve your assets, and to generate real returns.

You need to diversify along several dimensions. First, you should diversify across asset classes – equities, bonds, cash, and property. Your specific mix should be tailored to where you are in your investing life-cycle; work with a good financial adviser on this. Second, you should diversify across geographies. Having all your assets in one basket – South Africa – is risky. What if things don’t go great domestically? A sensible portfolio should have room for offshore assets, ideally in the developed world as South Africa is an emerging market play.

 5. Don’t trade too much

Last, but not least, try to resist the urge to tamper too much with your investments. As I’ve noted elsewhere, too-frequent trading can decimate portfolio returns. Buy and hold is, typically, where it’s at. There’s quite a lot of evidence that the best thing you can do for your portfolio is to leave it the heck alone.

* For more in-depth business news, visit biznews.com or simply sign up for the daily newsletter.



 
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