*This content is brought to you by Brenthurst Wealth
By Suzean Haumann*
The 2021 year ended with a hike of interest rates, higher inflation, record high petrol prices, a new variant of the Covid-19 virus and, of course, regular bouts of load shedding. But life returned to a different kind of normal as people started traveling more, going out to restaurants and returning to offices.
The after-effects of 22 months of upheaval since lockdowns were introduced (in response to the outbreak of the Covid-19 pandemic) will linger for months, if not years. Navigating the new state of play requires careful management of personal finances.
Advisor Suzean Haumann provides five tips to start a new year on the right track.
- Just start and make it automatic
Financial advisors always recommend to investors to start saving and investing from the moment the very first income is earned. Some, but not everyone, have adopted this discipline. But it is never too late to start. It can be small, but whatever the amount is, get going. Then automate it. Sign a debit order or set up an automated payment on the same date of every month and, very important, set it to increase annually. Review various options like tax free savings accounts, unit trusts or even a call account will work when starting out. As the amount saved grows it can be moved to more aggressive investment options with higher risk, but also higher reward over the long term.
- Expect emergencies
The dramatic changes brought upon by lockdowns locally and globally delivered financial challenges to many. The true value of having an emergency fund was finally realised and those who did not have such funds started making adjustments to their spending habits to set up such a fund. Saving for emergencies must be in an investment or savings product that allows for easy withdrawals. Saving up to six months of monthly income is ideal, but savings of equaling just two months will make a difference when the unexpected happens.
- Know what you spend
Setting a budget is the cornerstone of a sound financial plan. By keeping track of expenses, you can identify what you spend money on and where changes can be made. Drinking two cappuccinos per week at your favourite coffee shop (at R34 each for a regular size), adds up to R3 536 per year. As it is a small expense, most of us do not even think about it. Subscriptions not fully utilised can also add up. Paying R400 per month for a gym contract but only going once a month or receiving magazines that are rarely read also eat into a budget that can be better spent on savings and investing. It requires discipline to avoid instant gratification, but the long-term rewards will be great. In short, the frugal life is the safest road to wealth creation. To make it easy, look for a mobile app (e.g., Money Monitor or Wally) to track your spending habits.
- Understand diversification and asset class selection
Diversification is crucial for investment success. Markets all go through cycles. For instance, a sector might perform well – as evident in the commodities boom late last year – or a region (e.g., the USA) or an industry (technology has been dominant for years). Selecting asset classes – stocks, bonds, cash, property, etc. – is a subset of diversification and combined these two factors drive investment success. This ensures that investments values are protected when one asset class, or sector or region is underperforming while others deliver strong returns.
- Consult an expert
There are several factors to consider when devising a personal financial plan. Your personal circumstances, risk tolerance, investment goals and time horizon (especially important regarding saving for retirement), not to mention understanding economic factors, making sense of market fluctuations and which asset classes would suit you best. To navigate this and achieve your financial goals it is advisable to consult an experienced, accredited financial advisor. They spend all day every day looking at investment options, markets and tax considerations to develop financial and investment strategies. A professional advisor will take the time to understand your specific requirements and create a plan best suited to you. The impact of the Covid-19 pandemic on the household finances of households and investors around the world created challenges and, in some instances, caused panic. It is especially of value to have a financial advisor to guide you during the tough times. Beyond guidance, international research by companies like Vanguard has shown that investors who use a professional advisor achieve better returns over time than investors managing their financial plans themselves.