Living within your means is not necessarily the same as ‘spending less than you earn’. There may be circumstances – such as paying for a tertiary education – where you need to spend money in order to increase your future earning potential. Similarly, in order to secure a job, you may be required to have your own transport, making it necessary to go into debt in order to secure an income. Further, spending less than you earn will not build your wealth per se. It is how you employ your surplus money that will determine your future wealth. For instance, housing your surplus cash in a savings account as opposed to investing in the markets will do little to create sustainable wealth. Living within your means, even if it means using ‘good debt’ strategically, is one of the most important financial concepts to understand if you want to get ahead.
- Actively monitor your spending
Budgeting involves a lot more than merely keeping track of expenses. As you get into the habit of record-keeping, checking bank balances, double-checking your debit orders and querying fees, the process of budgeting eventually forms part of everyday life. Be ruthless with your budgeting. Query your bank charges, shop around for the best interest rates, interrogate your cell phone contract and read the fine print. It also helps to know your rights in terms of consumer protection especially if you have loan, retail debt, credit cards or other financial contracts.
- Pay your bills ahead of time
Make a habit out of paying your bills well ahead of time and try to pay more than the minimum amount required. This will help to reduce the capital amount owing sooner and reduce the amount of interest you pay over time. Paying well in advance will give you extra time in case mistakes happen, and will also alleviate the stress of having to make last minute payments. Further, advance payments will allow you to be prepared for other expenses you might be faced with.
- Read voraciously
With the broad selection and range of online publications, books and blogs covering the topic of financial planning, there is simply no excuse not to educate yourself – constantly. South African financial journalist, Maya on Money, runs an excellent blog. Personal Finance, Fin24, Business Live and MoneyWeb publish regular articles from industry thought leaders covering an array of financial planning topics. Authors such as Bruce Cameron, Robert Kiyosaki, Jean Chat sky, David Bach and Kirstin Wong have published excellent books on the topic of personal financial planning, all of which can be purchased online. Make it a habit to read at least one financial planning article daily, and at least one personal financial planning book per year.
- Say ‘no’ to your children
Even if you can afford to spoil your children materially, it is good to deny your children their ‘wants’ once in a while. Until they have traded a day’s work for a pay cheque, it is unlikely your children will fully understand the value of money. In a world where they can have anything, it is our job as parents to help them realise they can’t have everything. Children need to learn that no smart device or fashion item will make them a cool kid. There is no easier route to becoming popular and well-liked than by being a decent human being. Kindness costs nothing and has a higher rate of return than any other investment.
- Automate your savings
But be strategic about it. Find the balance between long-term investing and making provision for short-term emergencies. There’s no point tying all your savings into a retirement annuity while leaving your emergency fund short. Once you have built up your emergency fund to a suitable level, re-direct those monthly savings more appropriately. For instance, you may want to set up a unit trust portfolio to give yourself more exposure to the markets, or increase your home loan repayments so that you can pay it off quicker. Be sure to review your savings debit orders regularly, with specific triggers for reviewing them being salary increases, bonuses, interest rate increases/decreases or a change in life goals.
- Practice delayed gratification
The ability to delay gratification can have important consequences when making financial decisions because every purchase you make today is actually a withdrawal from your future financial security. Simply put, every purchase you make now can delay the point at which you achieve financial freedom. Research has shown that the ability to delay gratification is a key factor when determining one’s financial success. When considering a purchase, you need to make a decision between what you want nowversus what you want more. The ability to purchase almost anything online creates a real challenge for those who are prone to impulse buying; yet, on the other hand, online shopping provides you will ample opportunity to practice the art of delaying gratification.
- Ignore short-term market noise
Whether it’s Trump’s trade wars with China, arguments about the Reserve Bank’s mandate or Brexit negotiations taking unexpected turns, short-term market fluctuations as a result of political and economic (both local and internationally) instability is par for the course. If you are investing for the long-term, as opposed to speculating for short-term gains, then daily, weekly or even monthly market fluctuations should not distract you from your longer-term investment goals. By their very nature, investment markets ebb and flow. Part of being a successful investor means riding out volatility while waiting for the markets to rise. Focusing on day-to-day changes in the stock market will allow for panic to set it. Volatility dissipates over time, meaning that it really is time in the market that matters most.
- Communicate openly about finances
Talk to your partner and/or your children daily about money and personal finances. Be open with your loved ones about your financial goals, what you are working towards and how you plan to achieve them. Have age-appropriate discussions with your children, ensuring that all conversations about money are framed positively. Turn statements such as ‘we can’t afford it’ into questions such as ‘how can we afford it?’, or ‘I’m so stressed about money’ into ‘How can we manage our money better?’. Don’t keep financial secrets from your partner. Rather, embark on a joint financial planning journey together using an adviser that is committed to helping your achieve your mutual goals.
- Give to others
A recent study by Oregon University demonstrated that charitable giving creates a response in the brain that elicits a surge of dopamine and endorphins. Simply put, charitable giving makes you feel pleasure in the deepest part of your physiology. Studies also show that pleasure from charitable giving is felt regardless of the size, nature or value of the gift being given. So, whether you give of your time, resources or money, it is likely that you will experience greater satisfaction than people who do not.