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The best financial advice you might ever read

Reader’s question answered.

CAPE TOWN – In this advice column, Robin Gibson from Harvard House answers a question from a reader who is feeling pressure from supporting his wider family.

Q: I’ve been reading a lot about personal finance and how to manage it effectively. However I always spend money on things I did not budget for, which leaves me in a dire cash flow position every month.

I do not consume alcohol or cigarettes and always take a lunch box to work. I do not by a lot of luxury items and reduce spending on clothing to a minimum.

My primary bank account has had a parallel excel spreadsheet since June 2010, so I know exactly what I spend my money on. I’ve spent 18.36% of the last four years’ revenue on vehicles, 8.07% on insurance and repairs on the vehicles and 12.82% on my parents.

When emergency strikes in the family I am the go to guy. The majority of the financial burdens are carried by me.

I really want to have a worry free financial life and stay away from credit cards.

Please help.

It is clear that you are dealing with some very challenging social pressures that are increasingly becoming the issues of our time, both globally and especially in South Africa because of our historical context.

The current mature workforce will likely become known as the ‘sandwich generation’. This is largely because they find themselves as the ‘meat’ between the financial needs of their parents and their children.

In South Africa this dynamic is even further exacerbated for many black middle income earners who have an extensive network of family beyond parents and children that looks to them with financial expectations.

This is where the moral dilemma begins. How does an individual make quality financial decisions in this environment? I think every individual has to decide for himself, but to sink your own finances because of someone else’s expectations on you helps neither one of you.

I would thus consider separating those needing help into three classes with the following specific guidelines:

Parents

Parents deserve our honour, and in most cases have made enormous sacrifices for us. This needs to be recognised. I would however advise the following:

Start to have conversations with your parents early on. Do not assume that in the absence of comment, your parent’s finances are all peachy. Pride keeps people silent a lot longer than they should be, so starting the conversation early may pre-empt circumstances where events have overtaken you.

Think of planning generationally, because in many cases you have cash flow but little capital, while your parents have little cash flow but are likely to have capital. If you work together, cash flow can be put to work effectively for your parents, while the capital can take a longer term view that ultimately benefits you all.

Look to consolidate costs by living together. Multiple generations living in the same house can have real challenges and risks, but the benefits can be substantial. Things such as rates and maintenance can be managed better. But you must have house rules that allow each generation to have space and to feel welcome in the home.

Cover your risk, because medical expenses can sink any home. Retirees often compromise on medical cover as affordability shrinks, but poor health does not heed inflation, and shortfalls in the long term can create greater financial damage than the extra income benefits in the short term.

Children

We all want our children to go further than we have and there is often a desire for us to make sacrifices so that our children can benefit. I frequently meet with people who have precarious finances in retirement, but still want to dish out cash to children.

This is noble, but the best way you can help your children is by being financially independent. Investing wisely and beating inflation with your own assets could create just the legacy that will set them up not to be a burden to their own children.

Your children also need to fight their own battles. Getting through tough situations on their own will develop character and resilience. I can assure you that in most cases the children of wealthy people who can afford to dish out substantial sums to solve a problem are often worse off in character and attitude.

Only finance the necessities because if you make life comfortable for your children they will have very little incentive to make things change. By all means, ensure they are not living on the street but they need little else. But if you are going to help your children, define the terms and conditions carefully and stick to them.

And, finally, only lend money that you are prepared to lose. One of the most common things I encounter is parents who want to lend money to a child for a business venture.

But for parents to invest in their children’s business is just a bad idea. Most businesses fail within 10 years. The businesses that do not fail will seldom have the profitability to repay a substantial sum to a third party.

For this reason never loan any amount that you are not prepared to see as a gift. Failure to do so will make for some very uncomfortable family get-togethers!

Family and Friends

This is probably the most difficult area. Where do the boundaries of obligation lie? I would argue that they end with your direct family. This includes your own or your spouse’s parents and your own children.

It is great to help the broader family, but this can never come at the expense of your own financial planning. Hopefully the following guidelines could be useful.

If anyone approaches you for money, the right to ask hard questions is yours. If you consider yourself a good steward of your money, I think it is demanded of you.

When you do put your hand into your pocket, you must also make sure the rules are clearly defined. In fact, have a written agreement. This may assist you in the future, if the same relative returns for another loan having not stewarded the first amount wisely.

You must also consider who you are giving to. I like to see money as seed, and a farmer would seldom plant in soil that will not produce a harvest. Consider the individuals’ history and previous decisions. It is great to empower someone who seeks to grow and develop, but it would be wasteful to empower someone who doesn’t have these aims in mind.

Finally, and this point may be subtle, the key to building a long term financial plan is to sacrifice short term expenditure. Buy a cheaper car so that you can invest more monthly. Do without DSTV to settle the bond quicker.

By all means, if you are convicted strongly enough that you need to give to others, sacrifice short term comforts in order to do so. Eat less red meat, have cold showers three days a week, forgo your annual holiday, the options are almost endless.

But long term wealth creation in order to create financial independence is not optional or a luxury.

No matter what we do in life, if we are not intentional about doing it, we are unlikely to succeed. It’s the same when navigating the minefield of family demands. Have a policy framework, plan and re-plan, and in the end you are more likely to be successful than the individual who is merely tossed by every seemingly compelling demand that comes his way.

Robin Gibson CFP ® is a director of Harvard House Investment Management.

If you have any questions you would like answered by financial planning experts, please send them to editor@moneyweb.co.za.

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