What a budget really means is spending less than you earn and saving the balance. Most of us think we know the state of our finances, but right now can you say exactly how much you spend each month? Making a list of what you spend should not take longer than 10 minutes.
The 20-minute budget plan
- Log on to your internet banking or grab your latest bank statement.
- Place a blank “to do” list next to you.
- Take your bank statement and see what your net monthly income is.
- Deduct your fixed monthly expenses that are debit-order based. This will include items such as your bond repayments or rent, levies, car repayments, municipal accounts, phone bills, insurances, gym memberships and medical aid contributions.
If this becomes a very long list, note the items that are not essential needs.
- Review insurance. For short-term insurance this can be done telephonically. For long-term insurance, see if you can increase your group life cover (if you have it through your employer, this should be a bit cheaper). You will need to see a qualified financial adviser for guidance on this.
- Look at your variable expenses, paid by credit card. This is where the wheels come off for most. The most radical difference to your wealth building strategy can be made with items such as petrol, clothing, groceries, cash withdrawals and recreation items.
- Work out which of them are “need-driven” and which are “want-driven”. See what the need-driven items cost you.
Saving in bite-size chunks
The issue of retirement planning seems so complicated that many tend to ignore it. But breaking it down into bite-size chunks will help to understand where we are and where we are going.
What is the current value of your retirement funds and discretionary savings funds?
Your human resources department should be able to give you the company’s pension value and your broker will have details on your RAs and preservation funds. Look at the current value, not future projections. Discretionary savings include unit trusts, share portfolios, offshore investments, endowment policies, cash holdings and any other sources of investment earmarked for funding once you retire. Add the totals to your retirement funds and you will have a clear idea of what you have to work with.
How much should I be saving?
As a rule of thumb, you should target about 20% of your net income and invest in a high- growth investment. If you save 20% it will take you 25 years to reach a level that can sustain your current income. If you save only 10%, it will take you 32 years to get there. This means that if you start saving at age 30 and invest 10% of your net income, you will barely get there at age 62. And if your lifestyle needs change in that time – and they will – you will need to save more. Investing a portion of your financial windfalls (such as bonuses or inheritances) will become a vital part of your financial strategy.
Preserve your pension
One of the biggest financial mistakes is to cash in your pension when changing jobs. This temptation is one of the single greatest obstacles that keeps you from accumulating the wealth needed to retire successfully. It also leads to catastrophic consequences. One discipline to learn is “what goes to my retirement pool, stays in my retirement pool”.
Start now and go for growth
The main reason to start saving early is the effect of inflation. It is for this reason that your investment strategy must beat inflation over time, by more than 1% or 2%. For example, a 30-year-old who earns R5 000 a month should save 10% of her salary. Her aim is to retire with a pension of 70% of her salary just before retirement.
If we assume inflation is just 6% a year and her salary increases by 1% more than inflation each year, she will have contributed a total of about R830 000 by her 65th birthday. The total of her pension paid out during retirement (assuming her pension grows by inflation and she dies at age 80) will be about R9 700 000. This is more than 10 times her total contributions and is in fact more than her total earnings during her working career. This means that if she saves her entire salary under her bed every month and then uses it to pay for her needs in retirement she will run out of money before her death — a scary thought. So where does the rest of the money she needs for retirement come from? The answer is investment growth and although it sounds impossible the investment growth rate in this example is achievable.
Where to invest for retirement
Channelling the first 15% of your gross income towards a retirement fund is a tax-efficient start. The vehicles you choose will have a minimal impact on your investment return; just make sure that they’re tax-efficient, cost-effective and well regulated. The rest of your return will be up to your investment strategy.
If you are disciplined enough not to make emotional decisions when the market plummets in the short term, an aggressive (mostly share-based) strategy will always reward you greatly in the long term.
Make sure that you are prepared to stay there for longer than five years and bite the bullet during times of uncertainty. Choose a sound, solid strategy that you can sleep with and stick to it.
Information provided by Henry van Deventer, Acsis financial planning coach, and Andrew Davison, Acsis head of institutional asset consulting