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Tips on growing up financially

Prepare to break old, unwanted habits and cultivate new, effective ones instead.

Without even knowing you, I’d be willing to bet that most, if not all, of the New Year’s resolutions you made at the beginning of the year didn’t materialise. There’s no point agonising over that – it’s what happens to most people. But you can do something about it. At any given moment, you have a choice. A choice to do better. A choice to change.

Growing up financially involves breaking old unwanted habits and cultivating new and effective ones instead. The flaw in our thinking is that most often when we think about wealth, we think about it in terms of money. People who earn a substantial amount of money are considered wealthy in our society.

What we tend to overlook is that most people are dependent on their job alone for their high income, a job from which they might be fired, only to be left with mounting bills and growing debt. Real wealth is created from assets that generate regular positive cash-flow.

The best place to start is to put together a financial plan, or if you already have one, drag it out of the bottom drawer and get to work on updating the numbers to fit your current situation. There’s no quick fix but building wealth can be done. It just takes time and effort. Planning your finances means you can start to get ahead. A financial plan also helps you to manage life events such as buying a home, having kids, paying for education, or planning for retirement, without having to sacrifice the future that you want.

The right financial plan can help you minimise the bad, make the most of the good times and protect against the unexpected. The idea is to create a road map for the year ahead—not a rigid daily schedule, but an overall outline of what matters to you and what you hope to achieve in the next year.

In the beginning of the year there was doubt

To begin the process, ask yourself two questions and try to come up with at least six to eight answers to each:

  1. What went well this year?
  2. What did not go well this year?

For these answers, you should be mostly interested in events that you had control over. If something did not go well that you couldn’t prevent or control, it doesn’t need to go on the list. It’s also important to remember that all answers should be – S.M.A.R.T – Specific M – Measurable A – Achievable R – Realistic T – Time Targeted.

I like completing this list before doing any future planning. I’ve said before that we tend to overestimate what we can do in an average day but underestimate what can be done over the course of a year. Looking at a whole year in review, you may be surprised at everything you’ve accomplished. And next year, if you take this goal-setting process seriously, you may be even more surprised with how much you’ve done over the year.

The three commandments

Income – Has it been growing or falling? Putting a target income figure down on paper that you wish to achieve in the year ahead will focus your mind and allow you to consider what steps and actions you need to put in place now to reach your income target.

Savings – What is your current level of savings and how is it structured? Savings should be primarily focused on emergency savings for immediate use during unexpected events. Target a savings amount equivalent to three to six months salary. Remember that capital growth is secondary to capital protection. Vehicles such as a money-market or fixed deposit accounts are ideal for savings.

Retirement investing – How much progress did you make on this in the last year? Or was it another year in the trenches with little time spent planning for your inevitable retirement? Assuming you have some form of pension/retirement plan in place, during the next 12 months you’ll need to understand items such as:

  • How has my retirement fund behaved in the last year? Have I lost money or made money?
  • Do I know what type of investment funds I am invested in? Are they subject to a high degree of volatility?
  • How have changes in my personal or business circumstances been catered for within my retirement plan?
  • Am I setting plans in place now to ensure that I maximise on the tax benefits possible from my retirement investment?

Or do nothing. The time will pass either way. It truly is up to you.

In conclusion, things to keep in mind while setting financial goals include:

  • the time horizon—meaning how much time you want to take to achieve your goals;
  • the amount of money you plan to start with;
  • the amount of money you’ll need to contribute each month; and
  • how these goals may fit in with your risk tolerance as an investor.

Working with an advisor who provides access to solutions, tools, research, and guidance may help increase your confidence in meeting goals. An advisor should help you develop a plan that defines a strategy, timeline, and potential solutions that can help you pursue these objectives. But some people prefer to plan these things themselves. So be it, we still live in a democracy.

Having both personal and financial goals can help you plot a path to the future and can give you the motivation you need to sacrifice now to help make your ultimate dreams a bit more achievable.

ADVISOR PROFILE

Mduduzi Luthuli

Luthuli Capital (Pty) Ltd

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