Personal Finance 101

Personal Finance

What are the basics of Personal Finance?

This week’s guest is Anton Roux, He is a Certified Financial Planner in South Africa and he will share some wisdom regarding Personal Finance.

Poor people spend and invest what is left. Rich people invest and spend what is left.

The primary thing to remember when it comes to Personal Finance is to always pay yourself first. There are two reasons for this: Compound interest and to create a habit. Creating the habit of setting some money aside changes your perspective on the type of lifestyle you want. You need to get comfortable to live with 90% of your nett income. You are set up for future success, should you save from your first salary.

If you find yourself struggling to transfer money on a month to month basis, try to automate it with a debit order. Should you start with a small salary, it is not an excuse for not saving. Even if the value feels worthless at the time, the recurring habit of setting money aside will help you in the long run.

What about debt?

When I completed my studies I had a student loan in excess of R100k. Debt is an issue that almost everyone in their twenties has to confront.

“South Africans were the biggest borrowers in the world in 2014, according to a report issued by the World Bank. And they appear to be borrowing mostly from friends and family, private micro-lenders and to a far lesser extent from financial institutions.”

There are certain kinds of debt that are difficult to avoid (study loan, car loan, home loan) and it is therefore even more important to practice the habit of paying yourself first. It may take longer to repay your debt, but you will have compound interest in an investment account. As soon as the debt has been repaid, you will have savings that you would not have had if you did not pay yourself first.

Delayed Gratification

Our ‘instant’ culture is having an impact on our financial decisions. It has become too simple and convenient to buy things that we inevitably create unnecessary expenses. Teach yourself the discipline of delayed gratification. If you’re tempted for a fast-food lunch, take a moment to consider the cost involved. Is it possible to rather set that money aside and eat your packed lunch? Maybe it’s a good idea to unsubscribe from the “daily deals” email. Resist the temptation to immediately spend and you will soon realise that you have more money than you thought you had.

The 5 steps of Personal Finance

Step 1: Increase your Financial Intelligence

Take ownership of your finances. The financial lexicon may seem daunting at first but keep learning. Any decent news website has a financial section. Try to understand the terminology and the happenings in global finance. Even though you would rather watch paint dry, listen to the annual budget speech. I have been listening to podcasts on finance recently and one you can definitely try out is Personal Finance with Warren Ingram.

Step 2: Budget

Keep track of your expenses. Transactions done using a credit or debit card are easily accessible. Log on to your bank and download the transaction list as a .csv file. You can use MS Excel to open the .csv file and copy it into your budget. You can make better financial decisions when your income and expenses are in full view in front of you. If you are struggling to create a budget and need some assistance, send me a mail and I can send you an easy-to-use template.

Step 3: Start an Emergency Fund

Life happens. You need to set some money aside for the unforeseeable events. The rule of thumb is to have 3 months’ salary set aside for emergencies. As with your long term savings account, decide what portion of your income you want to save for emergencies and commit to that amount. Transfer the money into a Unit Trust. Depending on the trust, you can expect moderate returns and easy access to the money. Contact Anton Roux if you require assistance in selecting a Unit Trust.

Step 4: Compound Interest

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

Albert Einstein

The earlier you start accruing compound interest, the better it is in the long run. For example, John starts investing at age 25. He makes a monthly deposit for 10 years and leaves the account to grow. Bill only starts investing at age 35 but keeps investing for 30 years. Both investors reach retirement age (65 years). Because John’s account was created earlier, he has more savings at age 65. Even though John only invested for 10 years as opposed to Bill’s 30 years, he has a greater retirement fund.

Therefore, step 4 is to have the discipline to keep investing and not withdraw your investments for short term use.

Step 5: Protect yourself

You are your own biggest asset. Take insurance out for yourself:

  • Health Insurance
  • Death and Disability Insurance
  • Income Protection Plan

You need to ensure that your primary income generator is safe in the event of a medical emergency.

Thinking of Hiring a Financial Planner?

Financial Planners are paid either on an hourly basis or via asset management. The first consultation is free. You can discuss the future of your financial plan and how the financial planner will be remunerated at the first meeting. The financial planner is paid a percentage of your investment, should you wish to invest. If you are unsure where to go with your personal finances, I would recommend setting up that first meeting.