The last critical step, is to protect yourself where possible from unforeseen financial events. The points listed below will be expanded on in subsequent newsletters and posts but as far as possible make sure you pay attention to the following:
- Protect against Expenses
I realise this sounds obvious but I am particularly guilty of this. Every time I review my budget and compare my actual expenditure to what I think I spend I get a surprise. I then normally adjust my behaviour for a while. The trick here is to at least look and your budget annually and preferably more regularly. By being aware of your expenses you act more responsibly. Luckily, in this modern age there are great apps like 22 Seven that make expense tracking and budgeting easier. Once you are aware of how money moves in your life you can more easily take control, prioritise and direct it.
- Start budgeting – Use technology to make it easy. Regular reminders on your phone will make you subconsciously prioritise your spending better. For those competitive personalities it even becomes a game, to see how far under budget they can come in each month and then they get to decide what to do with the extra money.
- Prioritise a set portion to save. ‘Pay yourself first’! The surest way to never get ahead is to try save with what is left after you have paid all your living expenses. Put ‘forced savings’ (Debit order that increases each year) in place and learn to live with what is left. It is amazing how quickly you can adapt and soon you won’t even feel it.
By doing this and following the advice in step 2 you will take control of your money instead of feeling stressed out and being a slave to your money.
- Manage your Debt
This is the aspect of most people’s financial lives that causes them stress. The main reasons are usually the following:
- Making the wrong kind of debt. You get good debt and you get bad debt. Good debt makes you more money than it costs you. Bad debt is debt for things that get consumed and don’t generate a return.
Example of Good Debt: Financing on an asset that makes money, machinery, equipment, property and vehicles used in your business or to buy stock that you sell for a profit. If done correctly you will generate more income more from the assets or stock bought than it costs you in interest. The interest on this type of debt is also usually tax deductible making your after-tax interest rate lower. (10% interest rate on company vehicle less 28% = Net interest rate of 7.2%).
Example of Bad Debt: Personal credit card, personal loans and personal vehicle finance (sometimes). Typically, these types off debt are not making you more money than they cost you and the interest you pay is not tax deductible.
There are 2 specific wealth destroying behaviours I see in clients that always amazes me.
- Purchasing of Vehicles. Many people who are not financially free seem to purchase vehicles either as soon as they have paid their current vehicle off or 1 or 2 years thereafter. As if driving an older car is somehow unacceptable. This ego serving behaviour is damaging your chances of reaching your financial freedom. Please do not tell me it makes sense for tax purposes. Either you don’t understand taxes or your tax advisor is an idiot. I have been driving my car now for 10 years and am hoping to continue to do so for another 2 years. If you are regularly making debt to purchase a new car you will never get out of the ‘Rat Race’. If you instead start saving and investing your car installment after you have paid off your first car you should be able to either buy your 2nd car cash or at least put down a much larger deposit, which means a Smaller Loan = Less Interest = Faster Settlement = Wealth generation.
- Holidays! Going on holiday is not a ‘fundamental human right’. It amazes me how many people go into debt to go on holiday. I don’t have a long story to tell, just stop. Don’t do it. Every holiday you take with borrowed money is time and money you are ‘stealing’ from your retirement.
It’s actually quite simple, if you don’t Need it, but want it, then Save until you can afford it.
- Making too much debt. Most South Africans seem to think if they qualify for a certain amount of debt based on their earning then they must make use of the maximum amount. This leaves you vulnerable when your income situation changes since there is no buffer (surplus income) in your budget after paying your debt and living costs. Make sure you have an income buffer and keep debt to a minimum.
- Decrease your Tax (Link to video)
Tax efficiency doesn’t happen without proper planning but is one of the most effective ways to build and protect wealth. If neglected your wealth will be eroded by paying avoidable taxes. If done right, your wealth will grow with effective tax planning. The reasons that effective tax optimisation can lead to significant wealth generation is:
- It is the largest expense most people pay. Put another way you work for the government from January to May if you are in the top tax bracket. That is almost half your year. So even a small improvement in your largest expense can have a real impact especially over time.
- Tax optimisation generates a “Zero Risk Return”. What I mean by this is, that it is a rules-based system, which means ‘if you do this then that’ is the result, so the savings (return) gained are guaranteed, unlike the returns based on asset movements in volatile markets.
- Keeping more of the money you have already made is a lot easier than making more money. Remember, “Money saved is as good as money made” it might not be as exciting as seeing your portfolio grow or your payslip amount increasing but at the end of the day, when SARS either deducts less out of your account or pays some of your tax money back to you, there is no difference in what you can do with ‘saved money’ vs ‘made money’.
- Protect what you have from being lost
I realise many of you have had a hard year and have had to make sacrifices and cut expenses. Some of those expenses might have been your insurance products but please, as your financial position improves prioritise getting your financial ‘armour’ back in place. Nothing ruins a well laid plan like the medical expenses associated with a major medical event or the death of a partner and bread winner. Consider prioritising your protections as follows before you consider getting the DSTV back or booking that holiday:
- Protect yourself from Medical Expenses.
- 1st: Medical Aid – if that is not affordable;
- 2nd: Hospital Plan – this will cover the really big stuff. If you still can’t afford that;
- 3rd: Medical Insurance – a type of Short-term insurance product that offers limited cover a very affordable rates
- Protect your Income especially if you have dependents (wife and children or parents)
- 1st: Temporary Disability Income Protection – Most events that result in you not being able to work are of a temporary nature (you will recover in a few weeks / months). Get the insurance that will cover the most likely events;
- 2nd: Life Income (Monthly payments to family at death) – The only thing worse than being injured and unable to work is your family being without an income to live on when you pass away. This type of income is generally more affordable than lump-sum life insurance and also doesn’t have the risk of your beneficiaries losing the money with unwise investments and influences from 3rd parties;
- 3rd: Permanent Disability Income Protection – This is usually your 3rd income protection priority, since if you are not going to recover from your injury and it doesn’t kill you, then you will probably have to live with a permanent disability.
- Protect your Assets, after you have protected your income the next priority is to make sure that what you already have built up is protected. This takes the form of:
- 1st: Physical protection – This refers to loss due to unforeseen physical events, covered by your Short-term Insurance policies. Make sure your assets are covered from disaster.
- 2nd: Protection from creditors – This refers to making sure your debt is covered so that in the event of you being disabled or passing away you or your surviving dependents do not lose the roof over your heads and the ability to travel, since for most of us a vehicle is essential in being able to work. This type of personal insurance is referred to Lump-sum Death and Disability cover and unlike the income benefits discussed above, only payout once to cover a specific financial need such as settling a home loan or vehicle finance.
In short, to gain stability you need to take control. Taking control means also taking responsibility. To take control takes discipline especially in the beginning but it gets easier and like all things in life, becomes a habit.
Remember ‘motivation follows action’. Don’t wait to feel ready to take control of your financial life. Take action now so you can get to the point where you feel ready for what life throws at you.