Fi­nan­cial suc­cess made sim­ple

Ev­ery fi­nan­cial de­ci­sion made in the present will have a tan­gi­ble ef­fect on your fu­ture fi­nan­cial se­cu­rity. There are some core prin­ci­ples to abide by to en­sure that your fu­ture self isn’t short-changed.

Finweek English Edition - - ON THE MONEY | PERSONAL FINANCE - Ed­i­to­rial@fin­week.co.za for­merly head of beta so­lu­tions at Ned­bank Cap­i­tal, is a reg­u­lar mar­ket com­men­ta­tor and di­rec­tor of et­fSA.co.za.

we­live 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 nondis­cre­tionary 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. 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.

Spend­ing more than you have is no dif­fer­ent than rob­bing your fu­ture self.

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