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Financial Security – Do this one thing

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Macaroon

The one thing standing between you and financial security is in your head

Why is it that you find teachers that are financially secure all their lives and retire comfortably but CEOs earning 100 times more aren’t in the same place? It all boils down to one thing, spending less than you earn and investing the rest – for decades. Sounds simple right? Why is it then that so many people just can’t get it right? Essentially it has to with what is going on in our head. Our spending or saving habits are a result of years, often decades, of behaving in a certain way. Every time you behave in that way, the habit is ingrained in your psyche and changing it to get better outcomes very difficult. Difficult, but not impossible.

When you want to change a habit you can do it cold turkey or by taking baby steps, the method you choose is up to you but the problem with ‘cold turkey’ is that, unlike smoking or drinking, you still need to spend money. This is not unlike dieting, you have to eat to live, so you can’t just cut out all food. Crash diets rarely work in the long term, because the basic habit that caused the weight gain hasn’t been changed – changing poor financial habits are very similar. Slow and steady usually wins the race.
So, let’s take the principals of dieting and apply them to changing your spending habits.

  • Know what you’re consuming. I hate to use a new-agey buzzword word but by becoming more ‘present and aware’ of what you’re doing with your money you will bring you closer to a better financial outcome. In the (good) old days it is the equivalent of not balancing your cheque book and leaving your envelopes of statements unopened. Today it is not much different, it is just all digital. The good new with that is that you can get the technology to put it in your face so you can’t ignore it. I am sure you’ve tried to have a ‘budget’ many times in the past, but they are time-consuming and depressing. Free apps like 22seven make this dead simple today, but you have to interact with it, set the categories and limits and watch the notifications when you’re going over your target. Make friends with your money. Start watching what is going in and out, and make your own assessment if that is helpful, that change alone will start to change your behaviour.
  • Cut out the carbs. These days fat is good, carbs are bad – but either way, when you’re dieting you have to moderate the food-to-mouth disease if you want to lose weight. Once you’ve made friends with your money and put your consumption into categories you’ll soon find your weak spot (if you didn’t know it already). If you’re lucky, by watching your consumption you might also find long forgotten debits that can be killed off. If you’re paying for a loyalty program and not using the benefits, that alone can save you several hundred Rand month. What about bank fees? If the bank’s loyalty program isn’t virtually paying for that every month, look at changing banks. Use loyalty programs to their max, I personally get around R2,500 a month back on mine – and I am not talking about discounts.
  • Don’t have the food in the house. In financial terms, having the bank/credit card instantly available – even embedded in your cell phone – makes it much too easy to consume. Show your brain something it can understand – cash. Once you have identified your weak spot, or the place you think you can save money, take the month’s allowance out in cash and stop using the card. Many banks allow you to get ‘cash back’ at the grocery till which costs you a fraction of using an ATM and is way safer. If you have cash left over at the end of the month then spoil yourself with a little treat or take out less next month and move the balance into savings.
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So you want to be an entrepreneur?

in Behavioural finance, Business Assurance, Financial Advisory, Financial Plan Leave a comment

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Hidden traps waiting for unsuspecting entrepreneurs

Entrepreneurs, especially if they haven’t been cursed with climbing the corporate ladder or an MBA, have some unique challenges when navigating the field of personal and small business risk and finance. Perhaps it’s that fearless spirit and boundless confidence that will guarantee your success, but “jump and build your wings on the way down” sometimes ends in a bloody mess at the bottom. A bit of homework on wing design and jumping with the right tools would have prevented that – and the same goes for that entrepreneurial venture you dream about.

Test your idea: Unless you’re buying a franchise, a new venture usually starts with an idea, and with a product (which could be a service of course). It is important to iron out at least some of the bugs before you sink too much money into the venture. Who is your target market? What are their expectations? How much are they prepared to pay for the product? What after sales service do they expect? How often will they buy your product? How can you retain their loyalty? Don’t let a poor product sink your venture before it even starts.

Everyone needs to ‘maak’ a plan: Seat of the pants ventures or bootstrapping your way through the early years probably works a charm in your early twenties when you don’t have obligations, not so much later on. One of the biggest mistakes entrepreneurs make is to buy into the fallacy that business plans, financial plans, marketing plans, business qualifications are all bureaucratic nonsense designed to kill your dreams. Dreams and visions are all very well, but unless you know what your “break-even” is for example – and when you might achieve that dream – then it can become a nightmare. The good news is that all this information is freely available on the net, in books and online courses. Do all that homework and put your plan together before you leave your day job. If you’re ‘between jobs’ then use the time to do this homework, but keep looking for a job, even if it as a temp, Uber driver or from your rented room while you rent out your house. Money to launch your venture is hard enough to come by without spending it doing the homework and learning basic business skills.

Who are your clients going to be and how are you going to get them? This is key to any venture’s success. If you’re starting a business very similar to your ‘day job’ tread carefully, if you cannibalise their clients or copy their products, you might spend a chunk of your change in court. Brushing up on social media marketing and building your potential network takes time and trail and error as you find out what works and what doesn’t. You can also use social media to test your product or use free tools like Survey Monkey

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Financial Worry

in Asset classes, Behavioural finance, Investment Leave a comment
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Worry – paying for an outcome now that may never happen.

In uncertain times, like now, it is very natural to worry about the future, specifically to worry about your future financial security. Worrying is highly stressful and pretty useless, but one of the best ways to counter it is through action and knowledge.

One of the most useful things you can do is to understand what you can control and what you can’t. You can’t control the economy, interest rates, exchange rates and political climate. Sure, you can chafe against it, write letters, sign petitions or protest, but the bulk of your energy should be focussed toward things you can do to protect your wealth and your lifestyle.

Knowledge is power, I am not saying you need to know everything, but there is a certain amount of knowledge you need have so that you aren’t ‘unconsciously incompetent’ – when you don’t know what you don’t know. That is the most dangerous place to be. We all know that being unaware of a law is not going to save you when you get to court, and when it comes to wealth it is just as important. You don’t want to get 5 years out from retirement and realise that you’re going to have to keep on working into your 70s and 80s. Never abdicate the full responsibility for your wealth to anyone – not a spouse, financial institution, broker or advisor.

Always invest in yourself, not just by saving and investing what you earn, but in your knowledge and skills too. To have longevity in the economy, whether you work for yourself or someone else, you need to build the brand “You”. Don’t be sucked into by superficial things though – expensive clothes, cars and houses only impress the shallow and wanna-bes – and why do you care what they think?

Know your limitations. Even if you’re a knowledge accumulating machine, there is going to come a time where you are going to need help – or go the whole hog and become that professional. There is always going to be a medical condition that needs a specialist, a legal situation that needs a lawyer or a sabotaging behaviour that needs a coach/shrink. Sure, knowing the basics is a huge help and can save you a lot of money, but it is not a weakness to seek help, it is just smart. When it comes to managing your wealth, the days of ‘free’ advice from your broker is dying fast. Just like you can get accounting help that varies from a bookkeeper to a CA, the same applies to the management of your wealth, the Chartered Accountant equivalent in Financial Advisory being a ‘CFP®” (Certified Financial Planner)- a professional, internationally recognised designation.

While we cannot control the economy or politics, we can control most of our personal wealth and earnings potential – even in the most trying times. Being a Chicken Little (“Oh! Oh! The sky is falling on my head, I must go and see the King”) is negative, destructive and unhelpful. It might make you feel better to pull others into your perception of drama, but there are more useful ways to divert that energy. Quite frankly, if you have a Chicken Little contaminating your inner circle, sideline them, especially at times like these where there is so much uncertainty. Now is not the time to make knee-jerk decisions like selling all your investments or emigrating. You need to ‘keep your head when those about you are losing theirs,’ (with apologies to Rudyard Kipling).

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Those Little Luxuries are not your Wealth Killers

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lattefactor

Little luxuries are not your big wealth killers

A few years back the ‘Latte factor ®’ by David Bach was seen as the panacea to all personal financial woes. The idea was that if you forwent all those little luxuries (like your daily cup of Java) then you’d accumulate thousands and all your financial woes would be over. Frankly? Bunkum! It is the major decisions that will have the biggest impact on your wealth.

The biggest of these decisions is a house, specifically moving, even if you swap ‘like for like’. That one act is going to put a huge hole in your wealth, and one you may never recover from. On a R4.5m house for example, the costs are around R375,000. At R30 a latte, that is R12,500 lattes, or 2 lattes a day for 110 years – for just one move. Those costs are lost and gone forever and have not added a single cent to the value of your property. If you get itchy feet, before you go looking at show-houses and rope your spouse in on this wave of euphoria ( aka retail therapy on steroids), ask yourself why you are wanting to move house – and be honest (with yourself if not with anyone else). Keep those BS excuses of ‘better schools’, ‘safer area’, ‘more/less room’ for your friends. Don’t fool yourself with the ‘profit’ you’re going to make on the sale – where are all those other costs going to come from? That profit is a myth, most of it is just inflation. A couple of tips: Don’t fuel that want by ‘just looking’ at houses. Don’t rope in a partner who will encourage you. Think about some renovations. If you absolutely have to move, pick something you’re going to be happy with for a good 25 years if not the rest of your life. Holiday homes are a complete waste of your wealth, they are not just a dead asset but they cost you money every month. Sell it and invest in a couple of rental properties close to home.

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Divorce – The Wealth Killer

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The things to do to protect your wealth in partnerships

We all know the stats on divorce, and how they have exploded over the last 40 years. Today, 50% of all marriages will end in divorce, but perhaps one of the unlikely consequences is the severe impact of this act on the wealth of the individuals.

So let’s look at this in a bit more detail:

Marital regime: Whether you marry in Community of Property or Ante Nuptial Contract ANC (with or without accrual) will impact on your final divorce settlement. Community of Property (COP) is a dated and dangerous concept for your wealth so please take off the rose coloured glasses, don’t be a cheapskate and get some sort of contract in place. If you’ve left it to late to change, you may need to consider a Trust (most importantly if one of the partners has their own business). Remember it isn’t just community of property, but also of loss – in other words, the bankruptcy of one spouse will destroy the assets of both spouses. If you cohabit and live as man and wife but are not ‘married’ in the formal sense then you are barely protected by any law. At the very least, all major assets must be co-owned (at deed level), consumption (true consumption, not savings or investment contributions) be split 50-50.

Abdication: More often than not, one of the partners in a relationship will defer to the other when it comes to finances and let them do what they think is best. This is not delegation, it is abdication and it is not smart. You should be involved in the annual meeting with your financial advisor, and have an understanding of all your entire wealth portfolio. There is no way around it, if it is all Greek to you then upskill by asking questions and doing your own research. It is not cool to be clueless, your wealth is at stake.

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Fixed Income

in Behavioural finance, Financial Advisory, Investment, Retirement funding Leave a comment
fixed

What to do when you’re on a fixed income. Preparing for the eventuality.

The phrase ‘fixed income’ strikes fear into the heart of anyone anticipating retirement. The last thing any of us want is for that income to run out before we do. Making sure that doesn’t happen takes years, and decent investment advice, but irrespective if it is at age 65, 70 or older the chances are new ‘active’ income is going to stop flowing in and you’re going to have to start using ‘passive’ income (from whatever source). Thriving when your income is fixed (in other words just keeping up with inflation) is often a challenge especially when some aspects of your expenses exceed inflation (like medical aid) and force you to cut back. There is a limit to how you can ‘sweat’ those assets without exposing them to significant risk, so often consumption has to give. This is the ‘harvest’ period of your wealth lifecycle that you have been preparing for all your life.

Fifty years ago retirees were not expected to live much beyond 10 years after retirement at age 65, today you can easily live another 30 years, and this brings a whole slew of additional pressures to your fixed income.
The wealth equation goes like this:- Income minus Consumption equals Wealth. At retirement we are probably not adding to the Wealth side of the equation, so it must be managed properly and sustainably because it is going to feed back into the income – a closing of the wealth ecosystem/lifecycle as it were.

Before we get onto the consumption side of the equation, make sure that the fixed income is going to be structured properly. Diversify! Have a number of pots of wealth on the go, flexible investments, stock portfolios producing dividends, pensions/annuities, rental portfolios etc. If the ‘fire’ goes out under one of those pots temporarily, you aren’t going to starve. None of the pots are fireproof, especially not your own company if, like most entrepreneurs, you’ve poured all your investment into that. Every entrepreneur needs to have either an exit strategy that realises the wealth you’ve poured into the asset, or a solid succession plan that can produce an active/ passive income by way of dividends, director’s and consultant fees.
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