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25 enduring financial planning principles

It’s sometimes worth revisiting these enduring tenets of wealth creation.

When it comes to smart financial management, there’s no need to reinvent the wheel. While change is inevitable, there are some principles that have stood the test of time – and sometimes it’s worth revisiting these enduring tenets of wealth creation:

  1. Pay yourself first: Paying yourself first is about taking steps now to protect your future financial stability. The best way to do this is to set up automated savings to ensure that a portion of your income is set aside every month so that you start building your wealth as soon as possible. When it comes to investing, time and compound interest are your two greatest friends, so use them well.
  2. Wealth is what you don’t spend: The key to wealth creation is to spend less than you earn and invest the balance consistently into a well-diversified portfolio over a long period of time. Remember, it’s not what you earn that makes you wealthy – it’s how much you save.
  3. Your finances are your responsibility: Regardless of your personal circumstances, the sooner you take personal responsibility for your finances, the better. Never rely on someone else for money because circumstances and relationships can change at the drop of a hat, and the financial security you thought you had in the form of a wealthy spouse or pending inheritance is never guaranteed.
  4. Never stop learning: In a world of continuous disruption, don’t become complacent in your expertise. Commit to keeping abreast and/or ahead of your area of speciality so that you remain an expert in your field. Remember, you may lose your job, but you can’t lose your knowledge.
  5. Know the difference between good debt and bad debt: From the outset, understand the destructive forces of bad debt, and the way in which good debt can be used for leverage in your portfolio. Not all debt is bad and, if structured correctly, you can use debt to help build your wealth.
  6. Never borrow money to acquire a depreciating asset: Using debt to buy an appreciating asset such as a house or a business is sensible because your debt will reduce while the value of your asset rises over time. But, if you use debt to buy something that loses value over time – such as furniture or clothes – you not only end up paying a lot more than the actual price of the item, but the value of the item starts to decline immediately, which is a terrible combination of forces.
  7. Avoid lifestyle creep: As one’s earnings increase, it’s easy to slack off when it comes to keeping track of expenditure. What used to be considered luxuries can quickly become necessities that form part of your regular monthly expenditure. As and when your earnings increase, keep your expenditure in check by first allocating a portion of your increase to regular savings.
  8. If it sounds too good to be true, it probably is. This, unfortunately, is a lesson that many people learn the hard way. Be hypervigilant when it comes to falling for investment scams, including pyramid and gifting schemes. Any investment that offers unrealistically high returns in a short period of time should be viewed circumspectly. There is no quick way to make money, so find a reputable, registered investment house and stay focused.
  9. Don’t lend money to a friend: As difficult as it may be, avoid lending money to family or friends. Making soft loans to those close to you seldom ends well – and you may end up losing both your money and your friend.
  10. Save for a rainy day: The value of having an emergency fund can never be overstated. Besides providing one with financial peace of mind, a cash cushion can prevent you from having to borrow money in times of crisis.
  11. Be open with your partner about your spending habits: Financial infidelity can be financially and emotionally devastating, so play open cards with your spouse or partner when it comes to money. Set the ground rules for the management of your joint finances at the outset of your relationship, and don’t keep financial secrets from each other.
  12. Have a clear picture of what financial independence looks like: It’s hard to commit to saving and investing if you’re not clear on what you’re working towards. ‘How much is enough?’ is a question that every person must answer for themselves. Be clear on what financial independence looks like for you, and then commit to achieving it.
  13. Sleep on big financial decisions: Avoid making impulsive decisions, especially when the numbers are big. Whether you’re buying a property, making an investment, or purchasing a vehicle, learn to sleep on your decisions first. Do your research, seek advice, ask questions, do comparative analyses, and consult with those in the know. Delaying gratification will eventually become a habit you will be grateful for.
  14. Buy quality, even if it means waiting: The inability to delay gratification can result in us buying poorer quality items which often results in costing us more in the long run in the form of repairs or replacement products.
  15. The Joneses are probably broke: When it comes to money, never compete with those around you. There will always be people with bigger homes, flashier cars and fancier clothes than you. Those who engage in conspicuous consumption are generally heavily indebted and often broke.
  16. A financial plan is contextual: Find an independent advisor who can help you develop a financial plan that is fully aligned with your personal objectives. Your plan should reflect your morals and values, your lifestyle goals, and your vision of financial freedom.
  17. If you’re not betting on yourself, no one else will: At the outset of your career, make sure that you know your value in the marketplace and don’t sell yourself short. Learn to negotiate. Ask for increases. Apply for promotions. Back your own ideas. Learn how to fail and get back up again. Be entrepreneurial.
  18. Money can make you happy, but only to a point: Despite what we’re often told as children, money can make you happy – but only up to a point. Research shows that our emotional well-being rises in line with our earnings up to a certain point, after which it drops off. Our mental health is better if we earn enough money to cover our basic needs and maintain positive social ties. Buy experiences.
  19. Don’t leave free money on the table: There are a number of tax deductions and exemptions available which can help reduce one’s tax burden and it makes financial sense to employ these to your benefit. Tax planning is an important part of one’s overall financial plan, so be sure that you structure your portfolio so as to minimise your tax burden as much as possible.
  20. Know the value of a passive income: It’s difficult to build wealth if you’re selling your time. Your time is finite as there are only a limited number of hours in your workday. Relying on active income means having to physically work for your money – meaning there is a direct correlation between hours and income. Generating a passive income means that you can earn money even if you’re not actively working.
  21. If you’re in a boat and the water is choppy, stay focused on the horizon: Investment markets are volatile in nature. As markets rise and fall, we run the risk of succumbing to our emotions, trying to time the markets and locking in our losses. If you’re invested for the long-term, learn how to block out the noise and remain focused on your long-term goals.
  22. The money you earn and save in your twenties is the most important: Begin investing with your very first paycheque and don’t stop. Time and consistency will have a greater impact on your investments than chasing market returns, so think long-term and commit to a long-term strategy. The longer you put off your investment journey, the more difficult it will be to catch up. Never underestimate the cost of delaying savings.
  23. You will never miss the money that you save: Simply put, putting money aside every month is an investment in your future self, and you will never regret the decision to invest. A commitment to saving means living now like others won’t so you can live tomorrow like others can’t.
  24. The markets can remain irrational longer than you can remain solvent (John Maynard Keynes): Investment markets are almost impossible to predict and trying to do so can leave you financially ruined. Unless you’re a career asset manager, consider outsourcing the strategic management of your investments to reputable professionals with a solid track record.
  25. Learn how to eat well and sleep well: Chasing the highest investment returns possible is not a strategy. Investing for the long term is about balancing the need for returns against a number of other factors such as your propensity for risk, investment fees, time horizon, and cash flow requirements, while at the same time finding fulfilment in the present.
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Craig Torr

Crue Invest (Pty) Ltd

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