When considering writing these articles, very often inspiration is drawn from our interaction with our clients. Much of what goes into these written articles we publish is actually provided to us by our clients, their experience and the behaviours we witness during consultations with our clients.
This week I came across two such instances that made me think of the simple, starter step that anybody can use to begin the investment journey.
Before I relate to you what these two simple steps are we need to lay some foundation and briefly define what investments are and why they are necessary:
At its most basic form, investment is when a person delays spending money now to not only place this money aside for another time but also to try to get this money to work to generate more money in some way.
Why is investing important? Well simply, none of us ever know what is ahead of us. We never know what financial emergencies may arise where we will need to access to money quickly.
For the record, I do have a crystal ball in my office and let me tell you the only thing I ever see in it, is a distorted reflection of my face.
Step 1: Understand what you spend your income on and never spend more than what you earn:
During consultations with clients, we have never spoken to before, we always need to get an idea of the potential client’s cash flow. How much money comes home after tax and how much of that is spent? Are there formal methods being used for savings and investments through debit order arrangements as an example?
It always puzzles me when the person on the other end of the meeting table (or rather the computer monitor screen in Covid-19 times where many client interactions take place virtually) does not know the simple basics:
- How much they earn after deductions.
- How much they spend every month on average.
This is the first step in building wealth! Understanding your own cash flow.
Now, yes it could be that some people feel uncomfortable talking about these things, or even facing what they know to be true because then they would need to deal with a situation that is hard to deal with.
It can also be said that some of us believe that we are in a situation where there is not much we can do to improve our financial position, we need to pay home loans, put food on the table, pay for transport, pay for school fees and so on. Now, this may be true but, you should be able to have an idea of what your financial position is to be able to then create a wealth creation plan.
So, my first advice to anybody is, track what you earn vs what you spend every month. Monitor it, it can take you 20 minutes a month. Create a spreadsheet on your computer, write it down in a book if you have to, tracking your income and expenses every month is vital.
Someone once advised me to treat my own cash flow like a company, prepare a form of management accounts every month, it does not have to be a formal book of accounts, it needs to be something where you can track what you earn vs what you spend every month.
Tracking what you spend vs what you earn is the first step to spending less than you earn.
Spending less than you earn is the most important aspect of building an investment portfolio and building wealth!
Step 2: Put money away for another day!
When my son was very young and attending nursery school, they sang a song to help these very young children remember to pack their toys away it went something like:
“Clean up, clean up! Put away for another day!”
We should adopt this to putting money away and sing:
“Save up, save up! Put away for another day!”
This week I came across two cases where our clients needed medical interventions. They were both members of the best medical aids and on the top medical plans.
When their stays in hospital were over, they were faced with payments to be made to doctors and hospitals that were not covered by their medical aids.
This is when money that has been put away for another day pays for itself. Getting into debt to pay off medical bills is simply not the best idea.
So, when considering building an investment portfolio, start simply by having some money put away, where it can be easily accessible (a 24-hour call account is maybe a good idea) for these types of financial emergencies.
How much money should you have in such an account? That is a good question that truthfully only you can answer when you have a grasp on what you spend every month.
There is no right or wrong answer here, its an amount that you are comfortable with.
Personally, I try and keep about six months of monthly expenses, it’s not always easy and it’s not always possible but that is what I am comfortable with.
I hope this provides some insight into the foundation of an investment or wealth portfolio especially to our younger readers who are earning money for the first time.
The very wealthy people in the world always ensure that they spend less than what they earn and that they always have money to cover themselves for their short-term needs, this way they can then focus on the long-term goals.