The wealth chef

question

Posted by: | 2013/09/03 13:01

How do I allocate savings to short -, medium- and long-term goals?

I am really frustrated at some silly decisions that I have made in my 20s.

Now at 30 I am eager to create wealth, but discouraged at only having 25-30 years before retirement with two loans to pay off.

In total (vehicle: R145 000 and one personal loan: R28 000) I owe the bank R173 000, and have no money saved for a rainy day.

My minimum personal loan repayment is R837 (prime +5% over 60 months). I pay R1 000 and my car repayment is R2 458 (prime +1.3% over 72 months), so I currently pay R2 500.

What discourages me is the fact that I will probably only pay both of these off in five years. I currently have wealth protection in place (income protection, life cover & disability cover).

I have just recently started investing in two different unit trusts (local and international - R1 000 in total) and have opened a call account with my bank this month, with a fixed debit order of R300/month.

I have comprehensive insurance on my household contents and vehicle, and a hospital plan with Discovery. On top of my medical aid, I contribute an amount towards a medical aid "top-up" insurance in case I am hospitalised and my medical aid does not pay the full amount.

I do not prepare a budget for the balance of my salary as just over a third of what is left goes towards fuel, just under a third towards food and the last third towards toiletries/cleaning materials, prepaid airtime and 3G, etc.

I have no money allocated towards luxuries, clothes shopping, beauty treatments or fun excursions. I would love to also be able to go on weekends away or lavish holidays, or save for a deposit on a house.

My current debt percentage (in relation to my gross monthly income) is 19.44%. My current savings percentage (in relation to my gross monthly income) is 7.22%.

I would love for it to be the other way around (ideally combined as a savings percentage). So my questions are:

1. Do I pay the debt (at least the personal loan) off before contributing to a retirement annuity or vice versa?

2. How do I divide my savings (%) into short (clothes, things for my apartment, weekends away, hobbies), medium (overseas holiday, deposit on a house) and long-term (a comfortable retirement) goals, and which platforms are best suited for each goal?

3. What are the best platforms to invest money in, to retire with R8m at a reasonable age? The amount sounds outrageous at the moment, but your articles have really inspired me.

Anything is possible! I look forward to hearing from you.

expert answer

Posted by: Ann Wilson | 2013/09/05 15:13
You may not think 20-30 years is a lot of time to create wealth, but in fact it is way more than you need.

Being 30 now and already asking such awesome questions of yourself and others like me is a sure way to become financially free way before you choose to retire.

You have asked a lot of different questions and I will answer them as best I can in this format, but I strongly suggest you get hold of my book The Wealth Chef www.thewealthchefbook.com in which you will get all you need in much more detail and be able to put a comprehensive well structured wealth plan in place.

Regarding your debt: well done for already paying off more than the minimum. You want both of these debts destroyed as fast as you can and so find ways to add to those repayments. 

Your insurances: you don't say whether you currently have any dependents. Insurances are important wealth tools but often we tend to pay more for them than necessary, and have policies in place that we don't necessarily need.

Read the chapter - Protection pate in the book and make sure you have the right level of insurance in place for you.

From the information you have given, I feel you may be over-insuring in some areas like medical aid top-up as you are young, and that money could be going into an investment pot which as it grows will provide you with your own form of self insuring.

Remember, the purpose of insurance is to cover the gap between your current net worth and your target financial freedom net worth. When your own asset pot is big enough to look after your living expenses, you no longer need most of these insurance policies.

Investing: fantastic that you have started building your wealth pots. Make sure the investments you have chosen have low management and platform costs.

These are sneaky rats in the wealth pantry that eat away at your wealth feast. You don't say what you are investing, in but I suggest you look into exchange-trade funds (ETFs) as fantastic low cost investment products.

You may choose to reduce your current investment contribution by say R300 a month, and rather use this money to destroy your debt faster.

How to divide up your wealth pie: you already have clear knowledge on where your money goes, and this is such a key wealth skill.

In Wealth recipe #1 - wealth pie I recommend you aim to put 10% of your income into investments, 10% into saving, 10% into your personal growth, 10% into having fun, 5% into giving to others; 55% then goes to your day to day living, which includes your current debt repayments.

Since you are destroying your debt, 5% of the savings amount and the 5% giving amount should be thrown at the debt to destroy it faster.

So now to the fun pot. it is very important that you let yourself enjoy some of the money flowing into your life, so consciously allocate some money to this and then choose the things that really juice you to spend it on.

This help to fill you up and keep you motivated to keep destroying your debt and expanding your wealth pots. Go through your current everyday expenses - including your insurances - and make sure you are getting the most value from each expense in your life.

You are well on your way to financial freedom, just get more clear on the different parts of your wealth plan and make your money work hard for you.

Well done

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user comments

Posted by: Anonymous | 2013/09/05 14:37
Thanks so much Ann. No, I do not have any dependents. I contribute toward an equity fund and a worldwide flexible fund with no initial fees and an annual service fee of 2%. I will see what I can do about my day-to-day expenses. I have been advised by two different financial advisers that "top-up" medical cover is needed, as I do not have back-up cash available. I have also "shopped" around for my household and car insurance, and what I am paying is far cheaper - by about R 500 (even with some extras like no excess, roadside assistance and a few other things included, which the higher premiums don't include). I have been with my insurance broker for more than 5 years and have never had any issues when I submitted the odd claim. Thank you!
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