CAPE TOWN – In this advice column Anton Prinsloo from PSG Wealth answers a question from a young reader who is concerned about her financial future.
Q: My parents have both been unemployed and scraping in funds over the last two or so years for living expenses, as well as putting my two younger siblings through high school and university.
I am a 27-year-old female, working and earning a monthly income, putting some of it away into a retirement annuity (RA). I’ve been more than happy to help out wherever I can, such as paying my parents’ monthly phone bill, groceries or medical insurance. However, the funds in my bank account have been slowly decreasing and I am really starting to worry now how I will be able to create a financially secure future for myself when I am battling to save some of my salary every month.
My parents have both managed to find jobs, but have debts to sort out before anything can normalise again.
My question is, is there anything I can do now to protect myself and help ensure that I, too, won’t start to struggle financially or have a financially unstable future?
This is an unbelievably important question. Not being financially stable at retirement or in your later years is, in most instances, the result of not having kept to certain financial disciplines throughout your life.
There might be exceptions to this, as some people could also have been victims of fraud or experienced a dramatic change in circumstances due to factors outside of their control (like in Zimbabwe). However, most of the time landing in this financial position is self-inflicted.
While that might sound discouraging, the other side to that same coin is that if we cause most of our own problems, we must also have the ability to prevent them. To a large extent we can control our financial destinies.
Here are five guidelines you can use to protect yourself against falling into financial trouble later in life:
First of all, make the decision that you do not want to end up in this situation. This might sound like a stupid or trite way to start, but if you do not make this decision first and foremost, chances are that you will not implement any of the other guidelines, because being financially disciplined is not easy.
Secondly, save at least 15% to 20% of your salary. This is the first financial decision that you need to make, and it takes a lot of discipline to stick to it.
You have already shown that you have discipline, as you have your RA and manage to save up cash in your bank account. Well done on this.
It is difficult to save when you feel you have responsibilities to others, especially your parents, but the best way to do so is for this money to go off your account before you even see it. Have a debit order or debit orders in place that will move it into your investment accounts as soon as possible after you receive your salary. This way you won’t miss it, because you won’t feel like it was ever there to use.
You also have the added advantage of being young. At 27 you still have 38 years to save before you are 65. If you save 15% to 20% of your salary for this whole period, you have a very high probability of being financially stable at that stage.
Remember that compound interest is the eighth wonder of the world and if you save and invest money for long enough, the effect of compound interest (interest on interest) over time is astonishing.
The third important guideline is that even before you think about saving for your retirement, you should build up an access fund that can support you in difficult times. Ideally, the money in this fund should cover six months’ worth of expenses.
This is to protect you against something similar to what has happened to your parents. If you lose your job or can’t work for whatever reason, you want to know that you at least have the security of these savings to see you through a difficult period.
The next thing to consider is that you must manage your expenses. This is the only thing you have control over – where you live, what you drive, what you do in your spare time.
This is always difficult, no matter how much money you earn, because there are any number of ways we can spend our money. A lot of these expenses are necessary, and we cannot be without them. Some of them we cannot wish away, like the needs of your parents. But there are quite a lot of expenses that we grant ourselves which are actually only luxuries. These we need to manage and we need to ensure that they do not take away our ability to save.
The vital fifth consideration is that you should never make too much debt. The interest you pay on debt works in exactly the opposite way as the interest you earn on an investment. This means that whoever lends you the money will make a lot of money from the interest that you pay them over time, and you end up paying far more than you need to.
It is not always possible to avoid debt, because buying an expensive item like a house or a vehicle sometimes requires us to take a loan. But if you don’t really need the debt, don’t take it.
And in those circumstances where you do need to make debt, make as little as possible and pay it back as quickly as possible. You can save a lot of money by paying back more than the minimum instalments on a home loan, for example.
Finally, be sure to save in assets where you will have an inflation-beating return over time. Generally, this requires having exposure to shares.
Investing in an interest bearing bank deposit, for instance, only gives you a return more or less in line with inflation. After tax, you are probably not even getting that.
Jannie Mouton, founder of PSG, comments that more people would be more financially sound if instead of putting their money into a bank deposit, they rather invested in the shares of that same bank.
There are a lot of unit trust investments, exchange-traded funds and direct equity investments available in the market that can give you a good long-term return, as well as liquidity (the ability to withdraw your money if you need to). Taking responsibility, getting good advice and doing some research of your own in this regard is very important.
I hope these six guidelines will assist you in building your own financial framework further. You have definitely made a good start. Keep on making the right financial decisions in the future and, most importantly, be disciplined.
Anton Prinsloo is an adviser with PSG Wealth in Silverlakes, Pretoria.
If you have any questions you would like answered by financial planning experts, please send them to firstname.lastname@example.org.