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It was the Chinese philosopher Lao Tzu who mused, “If you do not change direction, you may end up where you are heading.” The importance of a sound financial plan is well documented, but how sure are you that you are aiming at the best target for your financial well-being? How many of these seven financial goals feature in your financial plan?
1. Live on less than you earn:
This may sound intuitive, but the sobering truth is that 86% of South Africans borrowed in 2014, making us the world’s largest borrowers according to the World Bank.
Only 16% borrowed to purchase assets (home or business), while 36% funded education or medical care. The rest was to fund day-to-day expenditure.
Start with a budget, stick to necessities and weed out luxuries until you have sufficient reserves. The general rule is 20% to savings, 50% (maximum) to necessities and 30% to discretionary items.
2. Insure first, invest second:
Investing is exciting, insuring is a grudge purchase. I recently witnessed a colleague and a family member have their financial plans derailed due to a serious accident and medical condition respectively.
When you start working, you have around 480 pay cheques until retirement, the present value of which is substantial. We often insure our houses and cars while neglecting our most valuable asset: our earning potential.
3. Get out of ALL your high-interest debt:
If your credit card is costing you 20% per annum, paying it off is equal to a 20% return on your investment (tax free).
This would be near impossible to beat on financial markets without taking nerve-racking risk.
In other words, paying off your credit card is a guaranteed return of whatever interest rate you are paying – there is no product or fund out there that would ever guarantee that return. Thus investors would need to take a lot of risk.
4. Have a well-stocked emergency fund:
While the general rule is to have three to six months household expenses in reserve, this will largely depend on your financial situation.
The consequences of an inadequate emergency fund are that you may need to liquidate an investment when market conditions are not favourable to cover an unforeseen expense.
5. Ensure security before prosperity:
According to Sanlam’s benchmark retirement survey, 60% of South African retirees cannot live on their income and 31% are forced to return to work.
Ensure that your retirement is secure before you start saving for discretionary goals and remember that a retirement annuity is still one of the most tax-efficient investment vehicles.
6. Start thinking of multiple income streams:
Around 20% of workers in the US and 15% in the UK telecommute (work from home).
The traditional paradigm of working from 9am to 5pm is shifting, leaving more flexibility to manage another income–generating asset.
While this is surely a long-term goal, diversifying your income stream away from one source (salary) alleviates risk, but also allows you to explore the rewarding process of building a business.
7. Have a plan to leave your financial house in order:
This is not a particularly pleasant topic, but no less important. Dying intestate or without a will can leave a real mess for your family to wade through.
Winding up an estate in this manner takes much longer as a court must deliberate on distribution of assets. Be proactive and work on reducing the value of your estate to minimise capital gains tax and/or estate duty for your heirs.
Finally, do not underestimate the impact and value a good financial adviser can have in coaching you and keeping you on track.
In 2013, the Canadian Funds Institute released a study which showed that households linked to a financial adviser managed to accumulate double the assets of non-advised households over a seven to 14 year period, and 2.73 times the number of assets when advised for 15 years or longer.
It is important to remember that measuring success depends on the extent to which you have achieved your financial goals, not necessarily the performance of your investment, but that is a discussion for another day.
*Paul Nixon is head of product enablement for Barclays Africa’s Global Investments & Solutions Unit
