Simple secrets to financial security

Did you know that Amazon founder Jeff Bezos was still driving a Honda after he became a billionaire? When asked by CBS what’s with the Honda, Bezos responded: “This is a perfectly good car!”

Money is a funny thing. Look at your social or professional circles – how often are you impressed by a fancy car, a big house or the person picking up the tab when you go out for dinner? If you look at the same people a few months into the COVID-19 crisis, are they as liberal with their spending?

Chances are you will be able to spot those who have been living beyond their means and those who are actually financially secure.

We want OUTvest clients to fit into the second category and have put together an easy-to-follow checklist to help you improve your finances.  

Step 1: Debt hurts!

According to data issued by credit Bureau Transunion, the average South African owes R19265 on their credit card, the average outstanding on a bond is R514 938 and R187 193 is the balance on motor vehicle loans 73% of disposable income goes to servicing personal debt at the moment.

As the Finance Minister explained in his Supplementary Budget, the situation is even worse when we look at the state of finances for the country.

While the argument is made that the country can borrow to invest in the long-term, the billions that have been sunk into the State Owned Enterprises (SOEs) is money that isn’t generating a return on investment. These are a lot like your credit cards or that personal loan you have taken out to fund short-term consumption.    

Debt is money you don’t have control over and effectively means somebody owns a part of your every monthly salary check. How many people do you know who are stuck in jobs they don’t like because they need to earn enough to cover their lifestyle? They are sacrificing personal health and wealth because they need the salary.

A few simple behavioural “nudges” such as making sure that every month you put money away that is yours and keeping any debt arrangements you have as simple as possible. Managing three credit cards, two personal loans, a store card and car payments is really difficult. Been there, done that, never want to go back. Ever.

One way of doing this was spelt out by Kristia van Heerden in her awesome Fat Wallet podcast series. Pay off the smallest amount first – because it creates a sense of achievement within you to carry on!

Remember that money that isn’t servicing debt, is money you control.  

Step 2: Savings are not investments, investments are not savings

If there is one thing that we have learnt while under lockdown, it is that both businesses and individuals are not good at building buffers and one bad month can derail your perceived financial stability. These kind of shocks have seen experts suggesting that companies might need to defer their retirement age by at least a year.

Whilst you might have some investments put away, it might not be a good idea to withdraw from them for a number of reasons, read about why in our other article about withdrawing from your investments.

This highlights the point that while you might be contributing to a Retirement Annuity (RA) in a disciplined fashion, you still need to be good at putting away something into cash or a money market fund, that you can easily withdraw for emergencies – the wonderful and underused Emergency Fund.

Step 3: Emergency funds are essential because there is ALWAYS an emergency around the corner

Nobody came into 2020 expecting to see the world stop as a result of the novel Coronavirus (COVID-19). No business owner could have foreseen a situation where the economy was quite literally switched off for more than 2 months and they would be forced to retrench staff.

Those who have managed to weather the storm best are those who had some form of emergency fund set aside for the unexpected. 

An emergency fund that covers 3 to 6 months of your expenses ensures that even if you do take an income hit, you are able to still take care of your financial obligations while trying to get back on your feet.

Step 4: Forget about timing the market, focus on your goal

Retirement planning remains one of the most important financial planning steps you can make for your future if you hope to enjoy your golden age. Investing in your retirement early gives your money the time to grow as well as enjoy the benefits of tax-free benefits in the future.

We highlight it in one of our previous articles – it is near impossible to time the market. At one point, many stocks on the JSE were down 30 – 50% during the month of March 2020 and yet by the time May rolled around, many of these losses had been completely erased. If you had panicked during the dip, you would have sold out at a steep loss. Your roboadvisor kept you invested through this process.

We can now add the volatility of 2020 to our institutional memory but the important factor to remember is that the tools are only as good as the financial habits that support them.

  OUTvest is an authorized financial services provider

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