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We live in an era of information overload but knowledge scarcity, like not having any drinking water during a flood.
Why, when there is so much information available on money matters, financial management and investment considerations, do so many people find themselves in financial distress, over-indebted and dependent on others in their old age?
Maybe the answer lies in an excessive focus on the complicated, and not enough attention being paid to getting the basics right, living within your means, saving on a regular basis and in a sustainable way.
The critical success factors are really quite simple:
- Don’t spend more than you earn;
- Save 10% of every rand you earn to fund bigger item purchases;
- Invest another 10% of every rand you earn in a low cost, tax-efficient investment vehicle and resist the temptation to dip your fingers into it; and
- Pay it forward by helping others – share your knowledge and resources to empower those around you to set them on their own road towards financial freedom.
The first step is the hardest for many people, yet the most crucial part to ensuring financial success. Spending more than you have is no different than robbing your future self.
Debt has the power to destroy the best plans and, as much as the compounding of interest works in your favour in saving and investment, it also works the other way, as interest payable can compound to the point of eroding even your non-discretionary spending.
Delayed gratification – the willingness to wait before expecting your reward – is a powerful differentiator between the financially free and those who remain broke.
Shorter-term saving for expenditure beyond your regular monthly expenses must focus on capital preservation, rather than seeking return.
What this means is that the return, or interest that you earn on these savings, is less important than the amount of money you save and resisting the temptation to spend it outside of its intended purpose.
The interest saved by not incurring debt will be much more than any potential interest earned on such savings.
The critical success factors for longer-term investment – whether for retirement or for building wealth – is threefold: minimise costs, maximise tax efficiency and never withdraw it.
- An annual cost differential of one or two percent may seem insignificant on a one-year basis, but over the 40+ years of building up your wealth base, this can compound to the point of reducing your capital by as much as two-thirds.
- Making maximum use of tax dispensations in a retirement annuity (RA) and tax-free savings and investment accounts (TFSIA) is one of the best ways to increase wealth and boost the size of your asset base. Tax concessions in an RA come in two forms – contributions are tax exempt (within prescribed limits) and growth (capital gains and distributions) is tax-free. Tax is only payable once you start withdrawing after retirement, at which time your overall tax liability should be much lower. A TFSIA, available since March 2015, offers full tax benefits after the initial contributions, which are not tax exempt, and limited in terms of both annual and lifetime contributions. All growth and distributions in a TFSIA are free of tax, there is no lock-up and no tax is payable at the time of withdrawal.
- Preservation of retirement savings is crucial as you move through life, changing jobs; growing your family; or expanding your asset base. Always resist the temptation to use retirement savings to fund short-term needs, get out of debt, or reward yourself with unnecessary ‘wants’.
The final component of a successful financial strategy is to share with, and empower others. A singular focus on your own financial freedom and success will not be sustainable if those around you remain a drain on you and your resources. You cannot be an island of prosperity in a sea of poverty. Share your knowledge and your learning, motivate and encourage others to also achieve financial independence and stability and then enjoy the satisfaction of shared success.
This article originally appeared in the 19 November 2015 edition of finweek. Buy and download the magazine here.
