It is a fal­lacy that only lower-in­come earn­ers must plan their fi­nances care­fully – even the rich can end up strug­gling af­ter re­tire­ment if they spend reck­lessly.

Finweek English Edition - - FRONT PAGE - By Paul Leonard ed­i­to­rial@fin­ Paul Leonard is Ci­tadel’s re­gional head: Eastern Cape.

big earn­ers need to fo­cus on build­ing wealth just as much as lower-in­come earn­ers. If you earn, say, R80 000 to R100 000 or even more per month you may think that you’ve made it. But get­ting out of the “hunt­ing state” and los­ing the killer in­stinct too soon could see you mov­ing right back to the bottom of the food chain.

True fi­nan­cial in­de­pen­dence means sav­ing up enough money to live off the in­come for life. How much do you need? As a gen­eral rule, for ev­ery R1 000 of monthly in­come that you want, you need about R240 000 in cap­i­tal.

Peo­ple who earn large in­comes for cer­tain pe­ri­ods should ide­ally take ad­van­tage of that higher in­come to feather their nest and fast-track their progress to­wards fi­nan­cial in­de­pen­dence. This strat­egy will en­sure that they can main­tain an above-av­er­age stan­dard of liv­ing for life. If you aren’t sav­ing, you can en­joy a re­ally com­fort­able stan­dard of liv­ing while the in­come is flow­ing, but then drop back into the sad pool of South Africans who have un­der­funded re­tire­ments once it stops.

Some peo­ple think that as soon as they earn a big in­come they no longer need to use a per­sonal bud­get. But this is a com­pletely er­ro­neous de­duc­tion that turns many top in­come earn­ers into hard-up pen­sion­ers with un­der­funded re­tire­ments, forc­ing them to find a job to sup­ple­ment their in­come in their 70s.

Many big earn­ers are un­aware that they need to be work­ing to­ward fi­nan­cial in­de­pen­dence. A med­i­cal doc­tor once told us that he al­ways thought that if he just put his head down and went for it every­thing would work out in the end. But af­ter do­ing a thor­ough fi­nan­cial plan he re­alised that his in­come had given him a false sense of se­cu­rity.

Big earn­ers are less likely to con­trol the out­flow of money in their month-to-month pri­vate spend­ing. If they see it and they want it, they buy it – with­out pay­ing at­ten­tion to mun­dane con­cepts such as ac­tu­ally bud­get­ing for it, which is for “lesser mor­tals with smaller in­comes”.

In fact, when it comes to fi­nan­cial faux pas, peo­ple with big­ger in­comes gen­er­ally make the most ex­pen­sive mis­takes. Big earn­ers tend to have a sense of fi­nan­cial in­vin­ci­bil­ity. They are not too con­cerned with go­ing into over­draft be­cause they know that they have the abil­ity to wipe it out in a month or two, if they re­ally had to. But the truth is that higher earn­ers can­not be to­tally re­laxed un­til they have built up an in­vest­ment port­fo­lio big enough to sup­port them for life: this is fi­nan­cial in­de­pen­dence. Un­til then, they should be in a kind of hunter state, work­ing to­ward the prize of true fi­nan­cial in­de­pen­dence. I’d like to share two ex­am­ples with you. Steve had a cash busi­ness with a huge turnover but a very thin profit mar­gin. Be­cause large vol­umes of cash moved through the busi­ness he made a con­sid­er­able amount of money, even though the mar­gins were wafer thin. He sold the busi­ness and bought an­other one with a lower turnover but larger profit mar­gins with the idea that he could spend less time work­ing and have a bet­ter qual­ity of life. How­ever, a few of the old habits that he had de­vel­oped dur­ing his big turnover days al­most sank his fi­nan­cial ship. While go­ing through a fi­nan­cial plan­ning ex­er­cise, Steve was asked to make a list of his debt. Af­ter adding up the num­bers he felt ill. He al­ways knew that he had many ac­counts but he had no idea that cu­mu­la­tively he was over R2m in debt. He re­alised that by be­com­ing ac­cus­tomed to deal­ing with enor­mous amounts of money on a daily ba­sis, he be­gan to dis­re­gard small amounts of R100, R500 or even one or two thou­sand. Do that for long enough and the small amounts be­come big amounts. By con­trast an­other self-made mil­lion­aire asked for help in reshuf­fling his per­sonal fi­nan­cial port­fo­lio. In­ter­est­ingly, this man, who is in the top 5% of in­come earn­ers, would query a R300 dis­crep­ancy on his bank state­ment. Although this was a small amount rel­a­tive to his wealth, he didn’t ig­nore it – he watched all his out­flows care­fully. In­come is not wealth. If you earn R1m and you spend R1m you are not get­ting wealthy, you are just liv­ing high. Wealth is not what you earn, it’s what you ac­cu­mu­late.

Big earn­ers tend to have a sense of fi­nan­cial in­vin­ci­bil­ity.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.