This article appeared in the June/July 2012 issue of Your Business and is the first in a five-part series based on the Personal Finance Series of seminars held at the Gordon Institute of Business Science.
Do you ever stop to re-evaluate and update your personal goals and priorities?
Many business owners become so engrossed in running their companies that they inadvertently end up putting their personal finances on the back burner. This may occur if most of their liquid assets are tied up in the business. However, to achieve financial independence and build personal wealth, it is important to make personal savings a priority. By conducting regular financial reviews, and taking follow-up action as needed, you can help develop and strengthen your personal financial position.
There’s a popular budget formula that self-proclaimed personal finance buffs bandy about for divvying up your income: 25%, 35%, 35%, 5%. For the uninitiated to the world of personal finance applying this approach rigidly isn’t always practical, warns independent financial advisor Paul Roelofse, but it provides a good starting point around which to structure a plan more tailored to your personal financial needs.
The breakdown works as follows:
- 25% of your gross income should be invested; think shares, retirement annuities (RAs) and unit trusts.
- 35% should be allocated to living expenses; food, travel, electricity, water and rates.
- 35% should go to service debt; your car, your bond, your in-store cards and credit card.
- 5% should be stashed away in a contingency or emergency cash fund.
Nevertheless, says Roelofse, speaking at the first in a series of personal finance seminars hosted by the Gordon Institute of Business Science, personal finance is not a one size fits all approach. We are all different with different needs, so we should all take responsibility for our own journey. There are, however, some key points which can help you navigate the increasingly complex world of finance.
For starters, you may consider enlisting the help of a financial planner or broker. But, warns Roelofse, this doesn’t give you carte blanche to abdicate your financial destiny. “A lot of people blame everyone else for the state of their finances. You have to take ownership of your personal finance from the beginning and work with it.”
Roelofse advises: “Don’t leave your financial plan to your financial planner. I’d suggest you work closely with your financial planner and force yourself to understand more. The artistry in financial planning today is trying to cut out all the noise and bring it back to simple, understandable language.”
If you treat your financial planner as a coach, a teacher, a trainer then you have the right idea. If you are looking for a guru to absolve you of responsibility then you’re asking for trouble. With or without a financial planner to guide you, the foundation of the process must be built on an honest assessment of your current financial situation, your goals for the future and the means you have at your disposal to get to that end point. “A good financial plan will strip out what you can rely on as an income-producing asset down the line. It will also help you to nail down (and come face-to-face) with your debt, by highlighting your assets and liabilities,” says Roelofse.
Your plan starts with a thorough budget and must be measurable and realistic. It must be appropriate to your individual needs and is arrived at by managing your expectations. “You need to know where you are now relative to what you need to do to arrive at the ultimate goal of peace of mind,” he says.
The end-game, for most of us, is a comfortable retirement, but it can also be financial security in the event of divorce, marriage, retrenchment or a change in life circumstances. Retirement, however, should be a key factor in your thinking. “If you look at the lifestyles of the over 65s in South Africa – in other words those people who are financially independent and able to maintain their lifestyles after retirement – that’s just 6%,” says Roelofse. Longer lifespans are putting retirement funds under pressure and your resources have to sustain you for longer, so factoring this in early is critical.
There are, however, some good universal habits which should be applied to your financial planning journey:
- Get into the habit of saving.
- Ensure your debt is “comfortably affordable” – in other words, “when buying your house or car, factor in the chance that rates will go up,” says Roelofse.
- Have an emergency fund which is easily accessible (possibly in a money market account).
- Insure yourself – “as a protection for your financial plan” – and make provision for risks.
- If it sounds too good to be true (like a 55% return on an investment) it usually is.
- Look into various products, vehicles and asset classes and develop a portfolio which spreads your risk around.
- Never forget the power of compound interest; start saving early.
- Finally, play with the “Rule of 72”, which helps you to estimate how many years it will take for an investment to double at a specific interest rate. So 72 divided by the interest rate = the doubling period (eg 72 / 6% = 12 years to double).
Finally, if you lose sight of where you are going, Roelofse offers a last word of advice: “In the medium term we all need cash for holidays, cars (and living), but long-term financial independence is what we set as our target and we work everything backwards from that.” All it takes is a reasonable vision and a lot of patience.
This is the first article in a five-part series based on the Personal Finance Series of seminars held at the Gordon Institute of Business Science.
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