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Smart money management

Smart money management

Executive Summary

After completing this chapter, you will understand the principles of wealth creation; the importance of personal financial management; the true cost of debt and the steps to take to achieve financial freedom. These steps include taking a look at your current spending habits, eliminating debt and then looking at putting aside savings. The next step is to set personal financial objectives and then compare your current financial position to that of your financial objectives. Finally, we look at getting the best possible returns for your money by looking at the various traditional investment vehicles and why it is important for you to educate yourself about the share market.


There are hundreds of strategies and approaches to making money on the share market. Some investors have their favourite "formula" for investment success, while many others have read various books and papers. Some approaches work well, some work intermittently and some do not work at all. This lesson is an attempt to synthesise what works and to extract some of the most important elements of this accumulated experience so that you may benefit from it.

The challenge is to learn as much as possible the easy way, by adopting a receptive attitude; an attitude that searches for answers rather than an attitude that is immediately cynical and negative. Some of what follows may seem very mundane and obvious at first, yet these simple and apparently obvious ideas often determine the difference between success and failure.

Some investors need to learn their lessons the "hard" way by first-hand experience. It seems that some ideas just cannot be easily absorbed from a book or lecture, but have to be driven home by a material loss in the share market. Other ideas appear easy to understand at an academic level but actually require investors to gain the sort of gut-level understanding, which only really develops with practice and personal involvement.

Prescribing investment rules for a successful investment may be possible; however, these rules may have to be amended as variables in the economic structures (i.e. monetary and fiscal policy) change. Even if these rules were applicable, each potential investor has unique circumstances. Most investors are risk-averse, and attempt to maximise their wealth. As a principle, investors maximise wealth by maximising return and minimising risk. Whatever the investor 's unique circumstances, the primary rule is to have an investment objective.

Setting financial or investment objectives forms part of the whole decision-making process. The investment decision process comprises an array of activities, which may for instance result in the making of a deposit or the purchase of shares. Attention should be given on how to investigate, analyse and select an investment that will be satisfactory. But, before proceeding with the investment decision and learning more about successful share market investment principles, the investor needs to assess his personal circumstances. Therefore, it is advisable to first have your personal finances in order.

Wealth creation

Creating wealth is not easy. Successful investors need discipline, patience, a little luck and perhaps most of all – knowledge. This lesson introduces long-term strategies used to build wealth. It is designed to improve your understanding of investing. Setting yourself on the path to financial freedom involves more than owning a parcel of shares or buying an investment property. To ensure financial security, your investments should be part of a comprehensive approach. Remember, it is your money to grow or lose.

In a fast-changing world, the stakes are high for investors. Retirement fund legislation has undergone significant changes with virtually all pension funds now operating on the defined contributions basis and the portfolios are market related. This structure puts the responsibility of choosing the "right" portfolios on the shoulders of the individual, who has either a very limited knowledge of the share market or none at all.

Secondly, terms such as wealth management and margin lending are increasingly becoming a part of everyday language. The Internet has also altered the way people think about, and act on, investment strategies. Of course, some things do not change: spreading risk across various asset classes is still the golden rule.

The fact that you are reading this lesson is a good sign. It means that you are serious about getting your finances in order, or topping up your investment pool. Taking time to understand investing will dramatically increase your chances of success.

Here are three points to consider:

  1. You do not need a lot of money to get started as an investor,
  2. It is never too early to start thinking about your financial needs for retirement.
  3. It is never too late to start financial planning and saving.

Please understand that we are wealth educators – NOT financial advisers or planners. Therefore we cannot and do not provide you with specific financial advice about investments. We believe that you are the best person to understand and decide how to manage your own financial affairs. We believe that proper research, personal understanding and financial education are the foundations for achieving financial freedom. We encourage you to use the information you read and hear, to research various possibilities to discover what investment vehicles and business opportunities are right for you at this and future points in your life.

There is perhaps no more important decision than to take charge of your own financial future. We live in a world of opportunity, and yet most people are buried in credit card and other debt. We are surrounded by people who are getting rich, but most of us are running on the spot. If you can read this, you are literate and have a computer; then you are part of the "wired generation". You can become as financially independent as you wish to be.

Principles of wealth creation

Mastering these principles will get you on the path to financial freedom faster. To maximise your wealth creation success we strongly recommend that you start with the first principle and work your way through the principles. Here are the Top 10 principles to wealth creation:

Principle # 1: Set Goals

First, you must establish your goals in writing. Twenty years of research have found this to be critical to successful wealth creators, yet 98% of people do not set goals and then wonder why they fail. In 1937, Napoleon Hill published the results of his study (in his best-selling book Think and Grow Rich) of America 's most successful men to find a formula for creating wealth. Napoleon Hill concluded from his twenty years of research that 98% of people who failed to create wealth, did so largely because they did not have a goal to work towards. Successful wealth creators did!

Goal setting sounds so simple you will be tempted to skip past here. Do not! Being focused is thereby a powerful wealth creation force that few people harness reducing their financial security and freedom. You accelerate your success when you learn from successful people. Very few wealthy people set out with a goal to simply become wealthy. Money for money 's sake was not what got them started and not what kept them going. Achieving their driving goals, proving their ability to themselves, the love of achieving and improving their personal best was what mattered most. That is why goal setting is so important. Yet, so few people set goals for themselves. What motivates you? Mostly likely it will not be reaching a certain Rand sum, but rather being able to afford certain choices in life, for example: taking a year off and travelling around the world, affording to start your own business, educate your children, give your kids a head start in life, etc. Make your goals specific and measurable so you can see your success and focus on achieving it.

For example:

  • Too general - "To be rich when I retire"
  • Specific and measurable - Save R1-million and to travel around the world in my first year of retirement.

Specific and measurable goals are much easier to break down into smaller, achievable components so that you can monitor your success. Goals should be challenging, but not unbelievable, just out of reach but not out of sight. For example, if you are currently 40 years of age and you want to save R1-million by the time you reach age 65, you can work out exactly how much money you need to save each month in order to reach that goal on time.

Decide to be financially successful. This is different than wishing, hoping, wanting or even desiring to be rich. Make a commitment that this is going to happen! Financial freedom is not an accident or matter of luck, and it usually requires some inconvenience. Have you decided to achieve this goal?

  • What do you want for the future?
  • Where do you want to live?
  • How many children do you want?
  • Are expensive overseas holidays important?
  • Challenge yourself to be out of debt by a specific date.
  • Make a commitment to saving an exact amount each month.
  • At what age do you want to retire?
  • Work out your goals and try to assess at what age they are attainable but be realistic.
  • Are you comfortable taking risks?
  • Do you tend to waste money?
  • Are you really prepared to make sacrifices?

Make a plan to achieve your goals. Having a clear, written plan helps an investor stay focused and on course. Many people are afraid to have a plan because they are not sure what they really want or are afraid things will change. You can always change your plan, but put those changes in writing. That will make you think about them carefully and help you avoid impulse changes. A budget and a plan do not guarantee you success at creating wealth; however, going forward without one is planning to fail. Before you set your goals find out where you are standing now. Each investor 's strategy will differ depending on their objectives and age. Breaking down large goals into smaller, achievable components is the easiest way to make sure you stay on track.

Principle #2: Pay yourself first.

The secret to financial success is to put something aside for saving and investing before you spend what is left. If you operate in reverse and save what is left, you will never have anything left to save and invest! You are a fool if you pay everyone but yourself. The secret to wealth creation is "part of all you earn is yours to keep". The part of your earnings that you pay yourself is the foundation of your wealth. Wealth is like a huge tree – it grows from a tiny seed. It takes a long time to grow to a great height, but provided it is watered and fertilised regularly, it will slowly, but surely grow at a faster and faster rate. Our money tree grows from our savings and is fertilised by compound interest plus added savings, which causes fast growth. When it comes to creating wealth it is not what you earn, it is what you keep! There are many high-income earners with large salaries and even larger lifestyles who are a long way from being financially free.

So how much can you afford to save and invest and still pay your bills? Create a budget and list your expenses and income and calculate your surplus income available to invest. A budget is a set of dreams and aspirations. It is how you really, really want to use money to benefit your family and run your life. Budget to buy the things you really want, and to eliminate the "impulses", the toys that waste too much of our income. A budget is a map to your destination. Have one and use it! You can now treat your monthly surplus as a fixed expense so you give your dreams the priority they deserve. Whilst doing your budget may seem boring it can be a very enlightening exercise. Once you have discovered where your money actually goes you are in a position to consciously decide where you WANT your money to go.

Remember: Income less Spending = Savings
Consider delaying some spending, as going without a few things now will mean you have lots more to spend down the track! Yes, this comes after making a budget, because when you begin getting control of your money (rather than the other way around) you have powerful new reasons to reduce expenses. Most self-made millionaires live far below their means! You should too.

Think about the following: "10% of everything that I earn is mine to keep." 10% gross earnings has always been regarded as a reasonable figure but this must be tempered with discretion. Persons with large pensions and retirement annuities, or ones who are reducing their home loan quickly may not need to put much more away at all. They are already saving plenty now. A single person or a couple who both work and have no intention of having children are not likely to have the same costs as people with large families.

Savings give you the power to multiply your income. Every Rand that you save is a slave that can work for you and every cent that it earns is another slave that can work for you, your family and your children 's children. One of the secrets of money is that if you save 10% of your income, invest it wisely, and do not borrow for depreciating items you can do whatever you like with the remaining 90%. Financial success is still guaranteed. You can spend the other 90% on clothes, travel or whatever you fancy, it does not matter. Most people have the expectation of working from the time they are 25 years old until at least 55 years old. For example: assuming a good education, many people would expect to make an average of R60 000 per year over that work life.

Total Years Worked: 30
Average Earnings per Year: R60 000
Total Money Earned: R1 800 000
Most People will have saved: R36 000
Amount Spent: R1 764 000

It is unlikely that any of us given R1 800 000 would give away R1 764 000 and only keep R36 000. Amazingly though, when done by the pay cheque, that is exactly what happens. It is human nature to spend every scrap of our income, yet if we do not have it to spend we do not miss it. The only way to save is to have the necessary amount taken out of your pay by automatic deduction. You are more likely to be successful creating wealth when you automate your success using a 'system ' so you can forget about your investing and focus on what counts – living!

Principle #3: Start Early

The important thing is getting started right now! Whether you start off with R50 a month or R100 a month or R500 per month, for every month you delay, you are losing thousands of Rands. A little money invested consistently over a long time makes a lot of money. Let us look at what happens if you invest R100 every month for twenty years with a 7% return. At the end of 20 years, you will have paid in R24 000, but you will have R52 093 in your account. What if instead you leave the money untouched for thirty years? Still investing R100 per month, the investment pool will have grown to over R121 997.10. Not bad.

240 Months

360 Months

480 Months

R100 invested

R 24 000

R 36 000

R 48 000

Investment pool

R 52 093

R121 997

R262 481


R 28 093

R 86 000

R215 000

Let us see, we put aside R100 per month for 360 months, which would be R36000. But our R100 a month investments earned almost R86 000, more than double the amount we put in!

How much would be there if the program runs for 40 years? The investment pool is now up to R262 481.34. Let us see, we put aside R100 per month for 480 months, which would be R48 000. But our R100 a month investments earned almost R215 000! R262 500 invested at 7% would give an annual income of R18 375 per year without touching the investment pool.

If you start at 20, at 60 you can have that income. Starting at 30 would allow withdrawal at 70. 40 would be at 80, etc. It is easy to see that the earlier the program is started, the earlier you can withdraw. But a program at 50 will still get you there at 80, particularly if you double the money to R200. Just R200 a month, beginning at 50, will give you almost R244 000 at age 80 when you would really need it.

Most of us know that schools teach us nothing about money. If this one idea would be repeated over and over again from primary school through to high school until it became literally part of the students ' psyches, we will definitely have a much better economy! For example: a 19 year old (Investor A) opens a savings account with R2 000 at an average growth rate of 10%. After eight years this fellow makes no more contributions.

A second investor (Investor B) waits until age 26 (eight years later). He also makes R2 000 contributions but he continues to do so faithfully until age 65 and gets the same return. Investor A ends up with more money than Investor B who contributed for the entire time. Remember, Investor A only contributed R16 000, whereas Investor contributed R80 000, almost five times more! The compounding effect of the additional 8 years is phenomenal.

Investor A

10% Growth

Investor B

10% Growth

Year 1 (19)


R 2 200

Year 2 (20)


R 4 620

Year 3 (21)


R 7 282

Year 4 (22)


R10 210

Year 5 (23)


R13 431

Year 6 (24)


R16 974

Year 7 (25)


R20 872

Year 8 (26)


R25 159


R 2 200

Year 9 (27)

R27 675


R 4 620

Year 10 (28)

R30 443


R 7 282

Year 11 (29)

R33 487


R10 210

Year 12 (30)

R36 836


R13 431

Year 13 (31)

R40 519


R16 974

Year 14 (32)

R44 572


R20 872

Year 15 (33)

R49 028


R25 159

Year 16 (34)

R53 931


R29 875

Year 17 (35)

R59 324


R35 062

Year 18 (36)

R65 257


R40 769

Year 19 (37)

R71 782


R47 045

Year 20 (38)

R78 961


R53 950

Year 21 (39)

R86 857


R61 545

Year 22 (40)

R95 542


R69 899

Year 23 (41)

R105 097


R79 089

Year 24 (42)

R115 606


R89 198

Year 25 (43)

R127 167


R100 318

Year 26 (44)

R139 884


R112 550

Year 27 (45)

R153 872


R126 005

Year 28 (46)

R169 259


R140 805

Year 29 (47)

R186 185


R157 086

Year 30 (48)

R204 804


R174 995

Year 31 (49)

R225 284


R194 694

Year 32 (50)

R247 812


R216 364

Year 33 (51)

R272 594


R240 200

Year 34 (52)

R299 853


R266 420

Year 35 (53)

R329 838


R295 526

Year 36 (54)

R362 822


R326 988

Year 37 (55)

R399 104


R361 887

Year 38 (56)

R439 015


R400 276

Year 39 (57)

R482 916


R442 503

Year 40 (58)

R531 208


R488 953

Year 41 (59)

R584 329


R540 049

Year 42 (60)

R642 762


R596 254

Year 43 (61)

R707 038


R658 079

Year 44 (62)

R777 742


R726 087

Year 45 (63)

R855 516


R800 896

Year 46 (64)

R941 067


R883 185

Year 47 (65)

R1 035 174


R973 704

Total Contributions

R16 000

R80 000

It is never too early to start. Good investors know that the quicker you start the more you end up with. Wealth creation is like climbing a mountain. It is much easier to start earlier and take a longer but flatter path than to wait till the last moment and try to sprint up the cliff face.

Principle #4: Use the Magic of Compounding

Most people have heard of compounding but do not really understand the power of compounding and if they did they would make entirely different financial decisions! With compounding, money makes money, which in turn makes even more money. Instead of withdrawing dividends or interest made by your investments, you add it back into your investment. You start earning interest on your interest. The good news is that the longer you give that process to work, the faster it increases which is why time and compounding work together to increase your wealth dramatically.

For example: if you had placed R10 000 into an account at a fixed interest rate of 8% per annum with the interest compounding every year, it would build up to R46 610 in 20 years. Let us imagine that you have a friend who also invested R10 000 on exactly the same terms but with an interest rate of 16% per annum.

It would be logical to think that at the end of the time that your friend would have twice what you have? After all, 16% is double 8%. It might be logical, but it would be incorrect. Your friend 's R10 000 would have grown to R194 607, while your investment would have only grown to R66 052. In this case increasing the rate by two, increased the return by more than four times. Is that not amazing? This knowledge could be worth a lot of money.

Imagine that you and your friend both kept your money deposited for a further five years (so that the term became 25 years and not 20 years). Your investment would grow to R68 484 and your friend 's would have grown to R408 742. During those extra five years, the dual effect of the longer time and the higher rate would have enabled your friend to grow his money six times larger than yours. The longer you stay invested the more dramatic growth you see as a result of giving your investment and compounding time to grow. As you can see compounding works best the more time you give it. Build your wealth faster and start today. Some people never get to hear about the importance of time and rate on their investments. Yet this is the foundation of all wealth creation.

Principle #5: Understand how money works

Most people have never studied finance or investing in school. Most people were never even taught to balance a cheque book! To master anything, you have to understand it. Read. Study what successful people do. Take classes or do a course. Master your relationship with money. Some of us spend for excitement, to show off, to prove we can. Some of us are addicted to spending, and some of us are just careless about it. Whatever your relationship with money, understand it and develop a relationship of respect, appreciation and gratitude. Use your money, rather than allowing it to run your life. Understand and accept the cycles of money. The setbacks you may have today or next year will not keep you from financial freedom. If you hold on to your goals and dreams, you will get there.

Most people fail to realise that in life, it is not how much money you make but rather how much money you keep. We have heard stories of lottery winners who are poor, then suddenly rich, then poor again. They win millions and are soon back to where they started. If you want to become wealthy, you need to become financially literate. If you are going to build a house, the first thing you need to do is dig deep trenches and pour a strong foundation.
Begin to learn more about successful investing. Most of us spend or speculate. Both are roads to disaster! Learn to invest in things you understand. Learn to invest cautiously, wisely, and regularly. The objective is not to "make a killing", but to get rich over time. Know and obey the distinction between gambling, and putting your money to work for you. Learn to recognise true wealth. Money itself will not make you financially free. That comes as a result of only that powerful state of mind, which tells us that we are worth far more than our money.

Principle #6: Understand risk & select appropriate investments

Successful wealth creators understand the nature of the investment markets and as a result choose more appropriate and successful strategies and investments. The most common investment strategy mistakes result from investors not understanding risk and selecting strategies and investments that do not match their risk profile.

Every single investment decision you ever make involves a balancing act between the return you want and the risk you are prepared to accept. We all want the highest return for the lowest risk. If only life worked that way! Well it does! When you understand all the risks, rather than focus on ONE type of risk you are more likely to select appropriate investments. When investing there are different types of risk. The main risk we worry about is that the value of our investment will fall so low we will lose all our money. In focusing on that ONE risk we overlook the risk that most people face: not saving and investing sufficient money or having an appropriate investment strategy to maximise their wealth. Inaction and a poor investment strategy is a high-risk plan which will cost you many choices in life and greatly increase the risk that you will outlive your money.

The risk of all investments change over time. Yet most people focus on the short-term risk only. Let us look at this concept using cash and shares which are at the two ends of the risk spectrum.


Short Term



Low Risk

High Risk


High Risk

Low Risk

For example, cash is low risk in the short-term and high risk in the long run. Savings accounts generate low interest, are fully taxable and after adjustments for inflation and fees, will almost always guarantee a small to zero (even NEGATIVE) real return. Which is why investing in cash is considered a high-risk strategy to fund long-term goals.

Shares are high risk in the short-term, i.e. high probability or chance that the value will be go down in the short-term. Yet history shows shares are low risk in the long-term, i.e. low probability or chance that their value will go down in the long-term.

To be a successful investor you need to understand the nature of investments and how risk changes over time so that you select appropriate investments. Yes, shares fall in value and that is why you do not invest in them if you need the money in the short term. However, they are lower risk than investing in cash when funding longer-term goals. Not saving enough or having an inappropriate investment strategy is the greatest risk most people need to be concerned about.

When you invest in a strategy, or anything else for that matter, make sure you understand what you are investing in. For example, do not invest in a strategy just because of its historic returns. Choose a strategy only when you understand what the strategy is about, why it has done well in the past, and how it fits into your plan. If something interests you that you do not understand, educate yourself. If you do not have the time or cannot figure it out, then find something you do understand. There are plenty of opportunities out there. Pick one you can explain to your spouse.

Principle #7: Spread your wealth to lower your risk

The reason the saying "Do not put all your eggs in one basket!' is so well known is because it is so true. Yet one of the most common mistakes made by investors is to have too much wealth in one asset or one asset type.

Research shows that by spreading your wealth across different:

  • Countries
  • Asset types
  • Individual assets; and
  • Fund managers, can:

  • Reduce your risk;
  • Increase your returns; and
  • Smooth your returns.

Investment markets generate different rates of return over different time frames. It may be that this year's best performing investment becomes next year's worst – so you should never rely on immediate past performance as a guide for immediate future performance.

What are the different asset classes?

  • Cash
  • Bonds (Corporate & Government)
  • Property (Residential, Commercial (Retail), and Industrial)
  • Shares (South African (JSE) and International)

The best way to reduce the risk that market fluctuations can present is to invest in a number of different asset classes, countries and individual securities as possible, according to your risk profile. The key to successful investing is not following past returns.

You will be more successful if you:

  • Select your own risk profile;
  • Set an investment strategy;
  • Select appropriate investments; and
  • Review your strategy annually to ensure you stay on track through changing environments.
Principle #8: The difference between assets and liabilities

In his best-selling book, Rich Dad, Poor Dad, Robert Kiyosaki says that, "when it comes to financial literacy, the first thing you need to know is the difference between an asset and a liability". He continues by saying that, "rich people buy assets, while the poor and middle class people acquire liabilities, but they think they are assets".

He acknowledges that while most accountants and financial professionals will not agree with his definitions, "an asset is something that puts money in your pocket, while a liability is something that takes money out of your pocket".

One of the main themes of Kiyosaki 's writing is that most people make the mistake of working harder instead of working smarter. His recipe for greater wealth assumes the tax regime of the United States, which taxes income derived from work at higher levels than income derived from dividends or property rentals. However most 'developed ' countries, follow this model as governments wish to encourage investment in property, companies and interest bearing securities.

More work attracts higher income tax, takes time and is hard work! Alternatively, the wealthy get their wealth to work for them. They invest in assets such as shares and property which will make them rich - and that are hard to spend on a whim!

Here is how to tell the difference between an asset and a liability. The diagrams below, reproduced from Rich Dad Poor Dad, shows the cash flow of an asset. The Income Statement measures income and expenses (or money moving in and money moving out). The Balance Sheet, as the words imply are supposed to balance assets against liabilities. To keep it simple, these diagrams have been simplified as everyone still has living expenses, including the need for food, shelter and clothing.

The arrows in the diagrams represent the "cash flow." Numbers alone really mean little, just as words alone mean little. It is the story that counts. In financial reporting, reading numbers is looking for the plot, the story. It is the cash flow that tells the story. It is the story of how a person handles their money and what they do after they get the money in their hands.

In most households, the financial story is a story of "work hard and you will get ahead". It is not because they do not make money but rather because they spend their lives buying liabilities instead of assets. There is also a flaw in the way many people think about money. They think that money will solve all th

eir problems or that having more money will solve all problems. In fact, money may actually accelerate the problem. Think about a person who comes into a sudden windfall of cash such as winning the lottery. Very soon the situation returns to the same financial mess, if not worse than the mess they were in before they received the money.

If your habit is to spend everything you get, it is most likely that an increase in cash will just result in an increase in spending. What is missing is not how to make (extra) money, but rather:

  • How to spend money:
  • What to do after you make it,
  • How to keep people from taking it from you,
  • How long to keep it, and
  • How hard that money should work for you.

Most people cannot tell why they struggle financially because they do not understand cash flow. They often work harder than they need to because they have learned how to work hard, but do not get ahead. They do not know how to have their money work for them.

Source: Rich Dad, Poor Dad, by Robert T Kiyosaki, published by Warner Books, May 2000

Principle #9: Accumulate wealth faster

Most people pay more in taxes than for food, clothing and shelter combined! It is your largest expense! The poor and middle class do not realise how much they pay because it is deducted from their pay cheque. Tax is like growing old – we have to accept it. We all need to pay our fair share of tax, but voluntarily over-paying your tax minimises your wealth. However, there is much we can do to minimise its adverse effects on us. The wealthy know there are legal and appropriate ways to shelter income, to invest in socially-responsible ways, and that the tax code encourages this. Learn the tax laws and use them for your benefit! (Yes, it is the most boring reading you will ever do, and worth it!)

It is important to understand the difference between "tax avoidance" and "tax evasion." Tax avoidance is perfectly legal and means arranging your affairs in such a way as to pay as little tax as is legally required. It is not too difficult, but it does take some knowledge, the aid of a good accountant or financial adviser, and the preparation of a good plan.

On the other hand, tax evasion means falsifying records and using artificial devices to avoid paying your legal share of tax. This is frowned upon by all good accountants and financial advisers and the very heavy penalties that are now imposed make cheating on your tax a highly dangerous pastime. Knowledge of the way tax works is vital for good money management.

There are four steps to minimise your tax. You need to:

  1. Decide how you are going to structure your investments to legally reduce your tax payable. Tax structuring decisions are never made with tax purely in mind. Other factors like:
    • Business owners protecting their assets from creditors in the event of unforeseen bankruptcy;
    • Protecting your children 's inheritance in the event of a second marriage;
    • Transfer of wealth to future generations;
    • Protecting your wealth in the event of a failed marriage.

Some of your tax structure options include:

    • Sole trader
    • Partnership
    • Companies
    • Discretionary trusts
    • Investment companies
  1. Select tax-effective investment strategies:

a.Peace of Mind wealth - Tax structuring

    • Short-term planned expenses
    • Emergency Fund (6-months salary)

b.Lifestyle wealth - Tax structuring

    • Savings plan
    • Regular gearing plan
    • Negative, neutral and positively geared property to buy another property or shares
    • Margin lending (borrowing against your shares to buy further investment)

c.Retirement wealth - Tax structuring

  1. Select tax advantaged investments that you hold within those tax structures. Warning: avoid 'investments ' that are only poorly managed, high cost and marketed solely on their "tax deductibility" because of their inappropriateness and high-risk of loss of capital.
  2. Buy and hold good quality assets so you do not trigger capital gains tax (CGT). With the continued growth in online share trading, many people try to TIME the market. They believe they can maximise their wealth by buying and selling long-term assets e.g. shares. Think long-term. After skimping on their savings, the thing that defeats most people is their inability to look at the long-term. Think about your long-term goals and the best ways to get there. When adverse events occur, always focus on the long-term impact. Do not let the short-term bumps be an excuse to raid your investments.

The value of each share and therefore the entire market is made by the buying and selling decisions of the millions of South Africans and International investors. When you guess the collective end result of the minds of all investors and make short-term decisions with long-term assets, that is behaviour akin to gambling. The success of your investment portfolio will depend on the length of time you spend in the market, NOT on your ability to buy and sell based on short-term market fluctuations.

Every time you buy or sell in the share market, you incur trading costs. And when you sell an investment that has performed well you lose part of your money to the taxman in the form of capital gains tax (CGT). This means that every time you sell an investment that has increased in value the taxman takes part of your money, so you will have LESS money to invest next time. As tax is such a complicated area we recommend that you seek professional tax advice from an adviser. They will recommend the appropriate tax structures suited to your personal, family and business circumstances.

Principle #10: Stay on track

Successful investors know that the only way to ensure they achieve their personal financial goals is to regularly review and fine-tune their investments. Not having your investments regularly reviewed can cost you thousands of Rands in unnecessary taxation, poor investment performance and missed opportunities. You can relax knowing that your investments are working hard. Car owners know the safety and enhanced performance benefits of having their car serviced on a regular basis. Few people spend that much time or money fine tuning their investment portfolio. If you did you would undoubtedly get better performance and a significant increase in your wealth, ensuring you arrive at the milestones of your planned financial life, safely and on time. Successful investors know that the only way to ensure they achieve their personal financial goals is to regularly review and fine tune their investments.

Preparing a financial plan, setting investment goals and assessing risk can be complicated, and it is an ongoing task. Set aside time to review your investment portfolio at least once every six months. Your investment review will provide you with the power and flexibility to make calculations and projections on proposed changes before they happen. Before you make a decision to change your investment portfolio you can see for yourself how your financial future might look.

There are three key areas where change will affect the performance and suitability of your current investment portfolio:

  • Personal changes - New job, new house, marriage, babies, new business, divorce, accidents, illness, retirement – there are many factors which do dramatically affect your personal life.
  • Economic changes - Changing financial conditions in South Africa and overseas can drastically affect the performance of your investment portfolio – up or down. Reviewing your investments can help to minimise losses and maximise gains as the markets rise and fall.
  • Government rules and regulation changes - Rules and regulations governing taxation, retirement funds and investment products are constantly changing. These changes can drastically affect the types of investment strategies and products suitable for investors.

The following diagram shows what happens when you buy and sell.

Be patient. If you have a long-term horizon, time is your ally. So use your time wisely. Do not rush into investments you do not understand out of some market-generated sense of urgency. The market is not going to disappear. Starting tomorrow or next week is fine. Especially, do not start investing before you have your plan in place. If the market goes down, do not worry. Remember that your plan is for the long haul. Besides, you are investing to improve your future, not to meet the basic necessities of life.

Finally, use your wealth wisely. Someone once said, "The reason most of us are not rich is that we would spend it all on ourselves." Give. Share. Help others. Give a portion of your money to others. By releasing an anxious grasp on your money, you will open yourself to receive all that is meant to be yours. When you use money to make a difference, to have a positive impact, you get the chance to do more. Being greedy and selfish will not draw money to you. Investing in your community, will!

Financial success

From the cradle to the grave, we are presented with many a portrait of what financial success is. From the images of self-made millionaires to television commercials that show a retiree in his mid-thirties throwing darts to determine where he should take his next holiday, we are presented with illusion after illusion of financial independence. Here is a simpler, more down to earth definition of financial success:

"You can sleep comfortably at night without worrying how you are going to pay your bills tomorrow because you are aware and in control of you financial position."

A few things you will notice about this definition:

  • It does not represent anything about how much money you might have.
  • It does not represent anything about how much money you might earn.
  • It does not represent anything about how many possessions you own or desire.

What it does do is state that financial success, like any other arena of success, is measured relative to an individual's happiness. You may have heard of many people with all the apparent trappings, a beautiful house, luxury cars and all the expensive toys, who are not happy and others who live from month to month earning modest salaries yet feeling confident, focused and in control.

When was the last time you were able to make a good and balanced decision when you were stressed out? Take your time. Really think about it...

Okay, we are guessing that you arrived at the same destination as we did- never! Stress leads to more stress, our psychological equivalent of chasing our own tails. And adding to the problem, more and more of us are having our tails chased by the landlords, credit card companies, banks and people we owe. We invite you to embark on a journey with us to build the tools to end this circle of stress and frustration, and begin to walk a path based on education, financial goals and some work efforts.

As schoolchildren we learn the fact that two points determine a line and that the shortest path between two points is a straight line. Place two dots anywhere on a page, lay a ruler down so you can see both those points, and then draw your line. To start on our journey of financial success, we are going to assume that we have the common theme to our financial dreams as defined above- to be in control of our finances, not overcome with debt, and can rest easily at night without undue worry. Our dream represents a point out in the future at which we desire to arrive. If we know where we want to go, we now need to know where we are before we can get there - our starting point! One amazing quality about these points on the path to our dreams is that as we could not draw a line without having the starting point as a reference, neither could we reach our dreams if we were not where we are today.

You will not reach the end point, financial security, on the first step. Your job is to identify the first attainable point between you and your goal and then take that step. From this new point of accomplishment, not only will you be able to better see your goal, but you can also perceive how far you have come from your starting point. We can look ahead and look back simultaneously and know where we are. This is going to be an exercise of self- awareness as well as the path to financial security. You have to be willing to look at your financial life objectively and clearly – to tell yourself the truth. It is always safer to know. We are really talking about your life. This is your life and you have to make your life fit for you, whether you are twenty-four or seventy four. You have to make your life work.

Achieving financial freedom

We are constantly presented with images of success from the time we are children. We are the Queens and Kings of the consumer economy. From being taught as children that if someone loves me they will buy me a gift, to the inundation of advertisements we see on TV, we are trained that we can buy our way to happiness.

This process leads too many of us down a road of living hand to mouth, or even worse, into a circle of debt and unending stress. You can always find something else to chase your tail over! Once you realise that you are giving away thousands of Rands in interest charges each year, then make a decision that "enough is enough". Decide to stop using your credit card, and avoid unnecessary credit purchases until all your debts (excluding your home loan) have been paid off. Here are four simple steps to achieving financial freedom.

Let us get started!

Step 1: the debt trap

"Debt is a humiliation by day and a worry by night." - The Koran

'Who wants to be a Millionaire? ' Almost everyone dreams of accumulating great wealth or becoming a millionaire. They earn a specific sum of money in their lifetime and like most people, they receive a salary cheque on a weekly or monthly basis. However, like most people, their lifetime earnings actually add up to three, four or five million Rands! After taxes, they are free to choose what they want to do with the money. By dreaming of great wealth, many people believe that it will empower them with complete freedom of choice. What most people fail to realise is that the choices they are making right now are the keys to their empowerment. Every month, you decide to increase or lessen it.

There are two types of financial decisions: those that work for you and those that work against you. One of the very first questions you need to ask yourself is precisely how much does it cost you to borrow money? You will earn a fortune in your lifetime, but if you manage your personal finances like most people, you will share their fate. There is no grey area in your financial decisions: they are either working for you or working against you. Through lack of knowledge, most people make choices that work against them. South Africans are piling up credit card debt at a record rate. Credit cards can be a legitimate payment system for responsible investors seeking rewards from loyalty schemes such as earning Voyager Miles. But too many people choose the wrong plastic. Are you a disciplined, punctual payer or one who relies on credit as a de facto loan? If you do a lot of travelling, choose a credit card with attractive loyalty structures and frequent flyer points. On the other hand, most department store cards have very high interest rates. Cut them up.

Before embarking on any investment strategy, clear the slate of debt. Pay off all your high-interest debts, such as credit cards, bank overdrafts or expensive lay-by items that are hanging over your head first. Here are some quick tips to cut debt: Spend less than you make (i.e. live within your means). The rule of thumb always is simple: If you cannot pay for it today, then you cannot afford it. Differentiate between bad debt and reasonable debt. The former incurs high interest rates (such as credit cards), while the latter refers to mortgage interest rates. Be sensible, while aggressively paying off bad debt and do not risk missing minimum payments on items such as your home loan mortgage. Hopefully, we have convinced you that debt is your enemy. Our next step is to start the process of eliminating debt. Here is a step-by-step guide to a new future with far fewer problems.

Make a list of all your debt

Record every expense you make, divide your spending into categories and record these weekly or monthly. Begin to identify where economies can be made and finally recognise that the process of making economies will be beneficial to your wealth and self-image.

Putting together a spending plan and a lean, efficient budget is going to get you nowhere if you are not committed to changing the behaviour that has got you into trouble in the first place. Ask yourself why you need that R400 000 car now, the new pool, the overseas trip every year. Is it to make you happy or to keep up the appearance of a perceived affluence? Many people get stuck in the debt trap because they insist on living a life they believe they deserve. It does not work that way. You lead the life you can afford, or you will end up poorer, not richer, in the long run and all those people you were keeping up with will disappear over the horizon.

Stress relating to debt often stems from having only a vague idea of what you owe. When it is all written down on paper in front of you, it is out in the open and you can start to deal with it. Identifying the exact size of your debt will put you in the strongest possible position to start dealing with it. From this, you will begin to save a fortune in lost opportunities. You have to face up to your debt. We know. This may not appear to be very pleasant, and that is why the majority of people do not. They just keep their heads down and push forward in the hope of someday getting out of trouble. The truth is that this is a form of denial where a lot of the deep-seated "pain" is generated. The only way to stop the "pain" is to stop worrying about the symptoms and start dealing with the cause.

Listing your debt is very therapeutic as you may realise, for the first time in many years that you are starting to regain control. There are several steps necessary to eliminating debt. Making a list of your debt position is one of your first steps towards achieving financial freedom. Make a commitment to get out of debt and get the problem out in the open, so that you can gain some perspective of the reasons why you are in debt. Enlist the support of your family or very close friends and enjoy the here and now … you are not starving or sleeping on the street yet. Develop a positive mental attitude by telling yourself, morning and evening, that you have your desired personal characteristics and that you will achieve your goals. Once you have begun to visualise a better life and to set specific goals, you must persist until you begin to see the results.

Understand the true cost of debt

When times are good and money is cheap, institutions fall over themselves to offer you credit. But beware that debt trap. Take for example, Mr Joe Bloggs … who thought he was living the good life with an above average job and excellent education. He had a number of sensible investments and drove a new BMW car. Yet, for all his education, he had never learnt to manage his finances, so when the one pillar of his house teetered, his world started collapsing. The pillar was his job. When the information technology (IT) bubble burst, he was made redundant and suddenly, he found himself unable to service his accumulated debt, which included the car, the house, the ski-boat, the overdraft, the credit cards and much of the furnishings in the house. Weeks turned into months without a job and soon even his practice of borrowing from Peter to pay Paul (revolving credit?) could not be sustained. He simple stopped paying his bills.

What happened next happened quickly. A default was recorded on his credit record, a payment profile that prevented him from qualifying for any normal bridging finance. Cut off from any form of credit at all, his funds dried up completely. A summons was issued and delivered to him, demanding that he pay back his debts, He could not. A judge then issued a court order and his creditors handed the case over to a collection agency that called, once again, to demand payment. By now Mr Bloggs was frantic. He set up a meeting with his bank, but to his surprise they were not interested in helping him, despite a good 20-year relationship. They informed him that because a judgement had been obtained against him, they could not help him. What they did not tell him was that the judgement entitled the bank to immediately add 15.5% onto his debt. The following week, the local sheriff arrived with a collection notice and attached goods in Mr Blogg 's house. He noticed that that they attaching far more than the amount he owned. They informed him that this was because his former possessions were all destined for an auction, where they would be sold for next to nothing and so the volume had to be the byword. The value of Joe Bloggs debt effectively became 10-times its original amount. But his woes were not over. The notice in his hand informed him that the collection agency had the right to add a fee; a devastating 30% on top of his already inflated debt. Unfortunately, Joe Bloggs is not alone.

According to Statistics (Stats) South Africa, there are:

  • 650 000 people in administration in the country, that is, under protection from their creditors;
  • 6-million people who are thought to be in a crisis, brought about by debt.

These figures are staggering but not surprising in a country where 56% of our disposable income is spent servicing debt. South Africans, it seems, love to live rich, even if they are not. (Living the champagne lifestyle on a beer income?). We are an instant gratification nation. This is one of the reasons so many South Africans experience difficulty with debt. We do not recognise debt as debt, but often mistake it for necessity, even as an everyday expense. One prudent bit of advice would be to see the bigger picture of your life and lifestyle. The first move in breaking out of the debt trap is take a step back and look at your life. This is often the most important part of getting out of debt. Then brutally and effectively assess your needs, expenses and income and then come up with a sustainable financial strategy for the real world. Your real world! So, you should be paying off ALL of your debts as fast as possible! We advocate paying off credit cards, which should rather be called 'Debt Cards', before you start saving and investing on the share market. Furthermore, everyone should be aggressively paying off their home loan as fast as possible. Of course, this statement would step on a toe or two... Getting debt-free looks like a smart thing to do now that pensions have shrivelled and jobs are starting to disappear... Better to own everything and then invest... than to own nothing and worthless investments, too. Our objective here is to make you aware of the road most travelled by self-made millionaires and help you change and improve your financial situation by understanding some of the 'secrets of the wealthy '.

Secret #1: Interest charges cost you more than you think!

When you purchase a television set or furniture item and finance it via your credit card or raise a bond to purchase a home, the interest rate quoted on your contract is known as the Annual Percentage Rate (APR) or "Flat" interest rate. This may be shown as 17%, 19%, 25% or higher. Flat interest rates are what it would cost you to borrow the money for one year. For example, if you borrowed R10 000 at 15% and paid it back in one year or less, it will cost you R1 500 in interest costs.

R10 000 principal
R1 500 @15% interest
R11 500 Total

In practice, most people will pay off loans over two, three, five or ten years and this causes your interest to compound. For example, if you structure a R10 000 loan, at 15% interest over three years, you will pay a total of R13 139. So, in effect, you have paid an interest rate of 31.4%, which is the compounded cost of borrowing money for periods of more than one year. Let us see what we would be paying effectively on interest rates over longer time periods.


Year 1

Year 3

Year 5

Year 10

Year 20

Flat Interest Rate






Principal Amount

R10 000

R10 000

R10 000

R10 000

R10 000

Interest Paid


R3 139

R4 916

R9 925

R21 952

Total Amount

R11 500

R13 139

R14 916

R19 925

R31 952

True Interest






Term: The length of time of the contract
Flat Interest: Cost of borrowing money for one year
Principal Amount: The amount borrowed.
Interest Paid: Total amount of interest charges
Amount Paid: The total of principal plus interest
True Interest: True percentage cost of borrowing for more than one year.

How does this affect you? You will earn a finite amount of money during your lifetime and the more you agree to give away, the less you have for the growth of your nest egg.

Secret #2: You cannot afford credit card balances

Credit cards can be very useful, if you pay off the full balance each month. However, very few people do just that. If you use credit cards, and do not pay off the full balance each month, you will be costing yourself a fortune in interest charges. The smaller your monthly payments, the more debt you roll forward, and the compounding effect on this increases your losses. Paying interest over lengthy periods has the effect of compounding your losses. By regularly paying interest charges on your major (or not so major) purchases is like letting the bank use your money to achieve their financial goals, leaving you financially dependent for life. Furthermore, habitual borrowing, even in relatively small amounts, over a long period, will take away every spare Rand you earn. Have you ever wondered why your credit card company is willing to accept such low monthly payments? Most people pay their monthly bills, so if you fall into the minimum payment trap you will pay back a lot more than you borrowed! Remember, you will make a finite amount of money in your lifetime, so you cannot afford to throw it away on interest charges!

Secret #3: If you cannot pay cash, you cannot afford it!

People who have achieved substantial wealth, through their own efforts, have largely avoided the high cost of borrowing by paying cash for the vast majority of their purchases and saving money that would otherwise have been paid in finance charges. Looked at another way, the cost of borrowing money is not just the "effective" lost Rands you are paying, it is also the lost income you will never receive from those Rands. What, for most people, appears to be the small cost of borrowing is, in fact, an enormous lost opportunity. By lost opportunity, we mean:

  • Choosing to pay interest charges, and
  • Not choosing to save.

Put another way, a lost opportunity is the possible benefit lost by taking a particular action. Make sure to ask the lender what the annual percentage rate of the loan is, how much it will cost in total and whether it has to be secured on your home or other assets? Another question you should ask is what procedure will be followed if you are unable to meet the repayments. Communicate with your creditors and deal with secured debt first, then with unsecured arrears. Deal with officials by name and be honest about your circumstances. Creditors do not like to spend time and money taking debtors to court if it can be avoided. Understand the consequences of ignoring court orders against you.

Sell surplus assets and increase your income

This is a quick way to cancel unwanted debts, but take the time to learn how to sell. Sell only what you do not want or need. Secondly, identify your main strengths and weaknesses and try to find work which will best use your abilities and experience. You must make strenuous efforts to get extra income and part-time work is the first thing to look for. If possible, get some training in a field that will enhance your market value, such as computing or bookkeeping.

Debt elimination

Let us say that by watching your spending habits, you are able to save R500 per month. We suggest that you first divert this money temporary towards debt elimination. Start by paying off the account with the least number of instalments outstanding.

Here is what we suggest you do:

  • Devote the R500 per month savings, plus all current monthly payments, to debt elimination.
  • First, pick the account with the lowest number of payments outstanding, add the savings amount and pay it off in the shortest possible time.
  • Then, with the money you are no longer sending to the first account, and your "savings" Rands, focus on the next account and settle that as soon as possible.
  • Repeat step 3 until all your accounts (except you home loan) is paid in full.

In a very short time you will have done what most people think is almost impossible – apart from you bond, you will be debt-free! However, to stay that way, you will need to form the habit of paying cash for your consumer purchases. You will love the freedom of not having all those monthly bills to pay, and will be saving thousands of Rands in interest charges. The end of your debt is in sight and the best is yet to come.

Learn how to save and invest
Once you have eliminated your debt, get into the savings habit by putting away part of your income each month. Try to get into the habit of saving something from everything you earn. Saving and investing money is like training for the Comrades Marathon. You cannot start training for the race a couple of weeks before the event. It takes months, if not years, to get a hundred percent fit for the race. The same goes for your money. The most successful savers are those people who have made saving a part of their life; it becomes part of their mind-set.

By getting into the habit of saving something from everything you earn, you are starting to use the power of compound interest, also known as interest on interest. This is the secret of a successful savings plan. At heart we are all idealists and start saving, but somehow we fall into the trap of stopping to save. First we skip a month, then the second month and so on until eventually we find we have stopped saving altogether. At the same time our spending pattern has changed and we spend all the money we earn, sometimes even more. This is commonly known as one of Parkinson 's Laws: Expenditure rises to meet income.

It is sad but true that most people do not have the self-discipline to stick to their investment plan. There will always be a reason why we will start "next-week" or "next month" with a savings plan. And pretty soon your savings plan will all be forgotten. Each year we delay starting a savings plan, we lose out on a great deal of money. It is not the interest on your money in year one of your savings plan that you lose; it is the cumulative effect of compound interest over many years that you lose. For instance: take someone at the age of 20 who invests R10 000 at a compound rate of interest of 20% over a period of 45 years. At age 65 it would have grown to no less that R36, 5 million! What would have happened had the same person waited until 30 to make the same investment? The money would have grown to only R5, 9 million. This is a difference of nearly R30 million. It sure was an expensive delay.

So what then is the solution? Make your savings plan as easy and as convenient as possible. Have the money deducted up-front from your salary, so you do not ever have the cash in your hand. Because then you might be tempted to spend it. Sign a debit order if you have a bank account. That way it becomes a way of life. And very soon you will forget that the money is being deducted from your salary. It is the habit of saving together with the growth on your money that builds wealth over time.

Step 2: Save yourself!

We defined financial success as the ability to "sleep comfortably at night without worrying how you are going to pay your bills tomorrow because you are aware and in control of you financial position." One of the gifts of being human is that we are all able to construct a vision, to dream of how we would like our lives to be. To quote from the book Illusions: The Adventures of a Reluctant Messiah by Richard Bach: "You are never given a wish without also being given the power to make it true. You may have to work for it, however." Our objective here is to help people to define their financial goals and then identify and apply the efforts it will take to make those dreams a reality. Let us now embark on building and utilising some simple tools that will help you progress towards financial success and security.

Personal statement of Assets and Liabilities

To many people accounting is a something of a weakness that they may want to strengthen. Like many of us, playing with numbers is not really our game and we spend most of our lives trying to avoid them. However, in business, as in the rest of life, everyone can do a job. Yet those people who understand the numbers that support the business, seem to be the most successful. We are going to use a very simple accounting trick to discover a bit about who and where we are now. For our purposes here, this serves as a good model for managing your own financial empire. We will help you clean up your financial act so that you can pass any audit that comes your way. Let us start with your personal balance sheet, a snapshot of what you own, and what you owe.

It will take just 15-20 minutes to perform this self-audit. Use your computer, cheque book, and all those under-used fingers and toes to add up your major assets and liabilities. Simply write down the balances of the following items:

  • Cheque accounts
  • Savings accounts, including money market accounts
  • Brokerage accounts
  • Retirement accounts, including Retirement Annuities and that secret offshore stash
  • Home equity, if you own a home
  • Short-term debt, including credit cards, student loans and motor car leases
  • Long-term debt - e.g. Home mortgage

Now see if you can answer these questions:

  • Is your net worth increasing?
  • Is your debt growing or shrinking?
  • Are you shocked by what you see? Appalled? Elated?

If you cannot determine what direction your money is going (up, down, or haywire), use your simple money rundown as a starting point for your personal audit, and repeat next month when you have a baseline for comparison.

Guess what? Now you have a snapshot of your personal statement of Assets and Liabilities! This single piece of information puts you ahead of the majority of people!

Personal statement of Income and Expenditure

Once you have come to terms with your financial reality, put it together in a budget. Most people do not really know how much money they are spending each month. Many investors forget a simple truth in that before you can spend money, you must save. And before you can save, you need a comprehensive budget. Therefore, we need to have you take a closer look at your monthly spending habits. We suggest that you buy a small notebook that is small enough to carry with you yet sturdy enough to be your constant companion for just one month. During that month, your task is to track every Rand that you spend. Sounds simple, and it really is.

To do this you need to account for all your income and expenses. Review your bank and credit card statements, cheque counterfoils, receipts and tax return for the previous 12 months. Salary wages will, for most people, be the main item in the income column. There may also be interest from bank accounts or investments, dividends from shares, rental income property and so forth.

On the expenses side, pencil in major items such as:

  • Bond repayments or rent
  • Personal and car loans
  • Credit cards
  • Taxes
  • Day-to-day items such as groceries, petrol
  • Medical Costs
  • Insurance Payments
  • School or Tuition fees
  • Utilities such as electricity and water
  • Telephone
  • Clothing
  • Entertainment
  • Recreation, including gym membership

The secret here is to include absolutely everything in your expenses column. Do not pretend you forgot the cell phone bill, smaller creditors and unexpected bills. Your list may also include things such as car repairs, kitchen appliances, sound systems, gate motors, swimming pool pumps, school fees, insurance premiums and tax bills, gifts and celebrations, birthdays, weddings, funerals, engagements, graduations and Christmas expenses.

In addition to what you record as your basic monthly expenses, track EVERY additional cent you spend. To make this exercise most enjoyable and useful, keep your notebook with your wallet and anytime you open your wallet or even take a Rand out of your pocket to buy some chocolate or a newspaper, record that expense in your journal.

It is a daunting task, but you need do it only once a year. The most important part of this exercise is not to judge yourself at any point for anything you spend money on. Do not change any of your habits, merely observe and record what you spend as though you were observing someone else. Just be gentle and honest with yourself, for building the clearest picture possible of your starting point will serve to help you reach your dream sooner than you might imagine. Have fun. Be a consistent and objective observer.

Take a look at your money flow
We have defined financial success as the ability to "...sleep comfortably at night without worrying how you are going to pay your bills tomorrow because you are aware and in control of you financial position." We then introduced the fact that in order for you to achieve a goal, you need an accurate and unbiased picture of where you are now. In order to gain that view, we recommended that you track all your expenditures, every Rand, over the course of a month. The objective is to help you fully understand where your money is going each month. No matter how many times people are coached through this exercise, the results are always amazing! Becoming aware of exactly how you have spent your money over the course of a set period of time is always a surprise. Whether you found that you spent R300.00 on cigarettes and R50.00 to cover up the smell or realised that buying that small bag of crisps with lunch everyday cost you R50.00 per month, the outcome is the same. How many times have you heard someone (including yourself) say, "I don't know where the money goes!" Following this exercise, you now know! The real key is what you do with this information now that you have it. This empowers you to make decisions about how you want to spend it in the future.

Categorise your expenses
The next step in this exercise is to separate the expenses you recorded into two separate categories.

The first is Necessities, which are expenditures that are a must for your daily existence:

  • Groceries
  • Bond Repayment or Rent
  • Water
  • Electricity
  • Basic Clothing
  • Basic Phone

The second category of expenditures is Discretionary Spending, which is any expense for something other than a Necessity:

  • Restaurants
  • Entertainment - CD's, DVD or Video rentals, M-Net or DSTV subscription.
  • Equipment - Radios, DVD, Software, games etc.
  • Subscriptions - Magazines, Newspapers
  • Dry Cleaning Service
  • Health Club payments, etc., etc., etc.

Now that you have segregated your expenses, let us take a look some essential financial concepts that will build our understanding and prepare you for the next step on the path.

Liquid assets and cash flow
You have probably heard the terms "Liquid Assets" and "Cash Flow." Let us take a moment and look at what these terms mean. A liquid asset is defined as a form of property that is easily and cheaply turned into cash. Marketable securities, such as shares, are considered liquid assets. But, it is easy to see from this definition that cash itself is the most liquid of assets. A simple definition of Cash Flow is the movement of money, such as in and out of a bank account or investment portfolio. Like the ebb and flow of the tides, the money comes in, the money goes out again.

Try this: Reach into a bowl of water and try to pick some up. Even if you are clever and cup some into the palm of your hand, it quickly runs through your fingers and out of your grasp. This is one of the properties of a liquid. Is this not the relationship we often have with money as well? We receive our pay cheque or bring in money through a business, then pay the rent, buy food, go to the cinema, and wonder where our money goes. The trick is to control the flow, and one of the ways we do this is to create a container for our liquid assets so that we can collect and conserve what flows our way! This is a necessary aspect of good money management that is practised by both individuals and companies, both large and small. Before we create our financial container, we have one more exercise to suggest. This builds on the results of tracking your expenditures over the past month.

As you track your expenditures again for the current month, observing each and every Rand that you spend, start to access the value of each of these items in your life. This part of the exercise will pertain to both the Discretionary Expenditures and what you defined as Necessities over this last month.

Ask yourself these questions:

  • How much does my dwelling or the car I drive really mean to me?
  • Does owning that new portable stereo or wearing that new suit help me achieve my life aims?
  • Do I derive a sense of satisfaction from my things?
  • Do they lend balance and support to my goals in some productive way?
  • How do my things affect my debt level?
  • What are the leaks in my liquid cash system?
  • Where is money flowing out of my life towards something that does not further my aims of financial success?

Each time you spend some money, gently observe and explore your valuation for what you receive in return. Notice your emotions at the time of your purchase as well as when you utilise the particular item or experience, and record your thoughts in your notebook. You can organise your thoughts relative to Necessities and Discretionary Expenditures, making them easier to read and review.

Create a simple spending plan
If you followed the instructions thus far you have divided your expenses into Necessities and Discretionary Expenses. You have also explored how you value each of these. Now we will take all this information and create a vehicle that you can use to change your future! A spending plan serves as our boat, a secure vessel designed to prevent leaks and keep us afloat economically, emotionally and psychologically. Your spending plan is simply a document that lists your projected income and expenses over a period of time. That is it! There is nothing very mysterious or complicated at all. As a basic format for your spending plan, write in bold letters the word INCOME at the top of the page.

Below that list all of your sources of income and the specific monthly amounts. For example:

  • Salary
  • Commission
  • Tips
  • Guaranteed bonuses
  • Alimony

Any other monies that come to you on a predictable basis with respect to both time and amount. List the amounts on both a monthly and annual basis. Below the sources of income, put another bold heading labelled EXPENSES. Under this heading we are going to put two subheadings. The first subheading should be Necessities. These are expenditures that are a must for your daily existence.

Your list of monthly expenses (i.e. Necessities) may include:

  • Rent/Mortgage Payment
  • Groceries
  • Water & Lights
  • Basic Phone
  • Prescribed medications
  • Health Insurance for you and family

The second subheading will be Discretionary Spending, which is any expenditure for something that is not a Necessity. Our experience would lead us to believe that when you recorded your expenses over the past two months, you were very surprised by how much of your money was spent on discretionary items. This list may include items such as:

  • Dining out
  • Movies/DVD or Video rentals
  • M-net or DSTV
  • Cigarettes
  • Software & Games
  • Subscriptions (i.e. Magazines, Newspapers)
  • Dry Cleaning Service
  • Health Club subscriptions

When establishing your spending plan for these Discretionary expenditures, keep in mind your larger aims. Honestly ask yourself:

  • Am I happy with my current financial situation?
  • Do I wake up and worry about how I am going to pay my bills?
  • I would love to go back to my studies but how can I pay for it?
  • How can I pay off my credit cards more rapidly and avoid large interest charges?
  • Is this the neighbourhood I want my children to grow up in?
  • I would love to get a new car, but how I can afford it?

These are key questions to ask yourself when setting the amounts for your Discretionary Spending. It is the spending on these non-necessities that can be changed most easily, thereby freeing up money to apply to current needs and longer-term aims. This is where our exercise in valuation comes into play. Is watching M-Net or DSTV more important to me than furthering my education so I can qualify for a higher paying job? Does spending a certain amount a month on cigarettes make me feel better than if I applied that money to reducing my credit card balance?

If your goal is to pay off credit card debt or other loans and get out from under the stress that these create in your life, include these in your list of Necessities. Plan for it and pay it off. If your expenses are larger than your income, this is a critical situation, and we urge you to seriously reign in your expenditures and avoid going further into debt. If this is an ongoing problem, you may wish to seek a debt councillor. Reducing spending is the key to reducing debt. It enables you to better service existing debt and at the same time trains you to learn cautious spending habits. Here are further tips on reducing spending and debt:

Short-term insurance policies take up a considerable chunk of our incomes. Look at ways that you can reduce that burden. Make sure that you constantly reassess your polices and change companies if you can get a better deal elsewhere. Remember, small high-value items such as watches and cell phones push up premiums considerably. You can save in the region of R150 a month or R1800 annually if you leave them off your list and choose instead to be careful. If you pay a larger excess fee, you can get substantial reductions on your insurance premiums. Always ask your insurance company for ways to reduce your premiums, e.g. by installing an immobiliser on your car, you may be able to save a good deal of money.

It is a well-known that South African bank charges are some of the highest in the world. It is less well known that your charges are not cast in stone and can be negotiated. Demand lower rates. Get a debit card and use it for as many purchases as you can. They are far cheaper than credit cards, cheques or drawing money from an ATM and paying cash in-store. If you must draw cash, do not go into the bank but rather withdraw from the ATM, but make sure that it is your own bank 's ATM as the costs of using another bank 's ATM are extortionate. Better still, pay with a card and withdraw cash in store, where available, like Pick n ' Pay, where the charges are even less than at your own ATM. You can easily save R12 000 annually by planning your monthly cash withdrawals.

Savings and Investments

One last suggestion for your spending plan: If there is money left over, it is time to start saving and investing. Add a line to your list of Necessities and call it Savings and Investments. The savings you will experience after settling all you loan accounts will pale in comparison with the savings you are about to achieve on your home loan. The monthly cash you will now have available will greatly shorten your home loan by many years, and save you tens of thousands, and possibly hundreds of thousands in interest charges. Many financial institutions now have budget calculators available on their websites that can do the sums for you, but remember that the results are only as good as the data that you input.

Here are a few of the benefits you will enjoy from aggressive mortgage bond elimination:

  • Peace of Mind.
  • Owning your own home, bond-free.
  • Many extra Rands to save each month.
  • Early retirement, while maintaining your desired lifestyle.
  • The holidays of your dreams.
  • Showing your family how to live a financially independent life.
  • Helping your friends realise that it is possible to become debt free on a fixed income.

Aim at paying yourself before any other bills, and consider this money no longer available to you. This is the way to start that nest egg to finance your long-term goals. It can also be a reserve for a true emergency (medical, for instance) that might occur. Would it not be cool if you could tell someone exactly when you would be able to pay them back, or on what date you will make that investment or purchase that is part of your goal? Your spending plan puts that power to plan in your hands. Now with a spending plan in hand, and hopefully putting your own savings first, you can plan for what you need and save for what you want, things such as new clothes, a new car, a new 72cm TV, a new house, etc. But remember this key: You earn first and then buy with cash. Buy what you can afford, stick to your spending plan and live within your means!

Step 3: Set investment objectives

The formulation of investment objectives is a statement of prospects for your financial future. Planning therefore centres on objectives and how to achieve them, and should be linked to specific time horizons.

  • Emergency Funds - Providing for the so-called "rainy day" is probably as important as taking out short-term insurance on a house or vehicle. Your first short-term objective should be to set up an emergency fund. Adequate provision should be made for any unforeseen circumstances such as in the case of retrenchment or a prolonged illness. A comfortable goal should be in the region of three to four months ' earnings. This should be easily accessible (e.g. the Access-type of mortgage bond of your home loan account or alternatively, a money market account) and reassessed on a continuous basis.
  • Short-term Objectives - All funds in a call or savings account should not be looked upon as emergency funds. A predetermined portion of money from the net income should be set aside for any expenditure foreseen in the next few months or say, 12 months, such as a car service or a new washing machine. These may be important and unavoidable expenditure items and funds set aside should not be subjected to a high-risk investment. Potential investment instruments are therefore fairly restricted.
  • Medium-term Objectives - A medium term objective can be set for any period ranging from two to five years. Funds for a medium term objective may be accumulated for a deposit on a house or buying a business. These funds need not be accessible immediately. For a medium term objective, funds may be directed towards fixed interest-bearing securities. These investments may be subject to capital fluctuation, which is regarded as dangerous for a short-term objective.
  • Long-term Objectives - These may be for any period from five years to an indefinite period. The more usual objectives may be the provision for retirement and the tertiary education of children. As the time span of long-term objectives is not known in all cases (for example, provision for death) it is not always easy to choose an appropriate investment instrument. Possible investments to consider may be endowment policies, retirement annuities, unit trusts or even shares.
Your current situation compared with your objectives

You now need to prioritise each financial objective within each time horizon. A priority list may give an indication of needs with a high priority that has not been met and which would require more funds than needs with a lower priority. Consideration should be given in re-prioritising the needs. This would mean more funds would be available for needs with a high priority, since those with a lower priority would have been set aside. The knowledge of your current financial position and the financial risks faced before considering any investment cannot be over-emphasised.

"Knowledge is power" is no less true than when it comes to investment decisions. No person can be expected to make a sound decision in a field in which they have no education. The objective of this training program is to put this "knowledge" into "action" and to introduce you to some basic share market concepts. The idea here is to "orientate" you into the share market and to give you an overview of the share selection process. There is no magical formula to share selection. Your initial selection of shares is probably going to be about 90% guesswork and 10% understanding, but as your knowledge progresses you will develop the understanding, experience and confidence to take responsibility for your own money, to select shares and time your transactions for the best profit.

Whatever your background and experience, most people have never entertained the possibility that an ordinary person like themselves could ever reach a state of financial freedom. In this country the average person needs only two things to become wealthy:

  1. The knowledge of what to do; and
  2. The discipline to practice the things to be done.

Unfortunately for those who are trying to find out what to do, the task can be very difficult. There are hundreds of books available about making and handling money but very few start from the basics, and even less show practical ways that work. This lesson is a down-to-earth guide for all. The aim here is to introduce you to the world of prosperity and you should use what is in here as an introduction to learn as much about the whole subject of successful share market investment. So get ready for your first few steps along the road to financial freedom. All the methods can work for you, if you will work on acquiring the discipline. Remember it all starts with you and your investment objectives.

Step 4: Getting the best returns

Staying out of debt and beginning to save, we hope makes perfect sense to you by now, and hope that you realise will also make an extremely positive impact on your lifestyle. One of your next major financial goals should be to achieve financial freedom. The expression "financial freedom" would sum up most people's monetary aspirations, but it is important to quantify this idea clearly so that it can become a concrete plan, achievable within a defined time frame. Financial freedom implies freedom from financial worries, and, more specifically, freedom from the need to work. This can only be achieved when the income that you receive from your investments exceeds the income that you receive from your work (i.e. your salary). Put another way, financial freedom is the point where you are earning enough from your investments so that you can live off them and no longer need to work. This is a useful definition that suits all people irrespective of their situation or salary level.

To achieve financial freedom, you need to do two things:

  1. Save about 10% of your gross monthly income.
  2. Make your savings work for you as hard as they can.

Building an income-generating capital base
Your first objective is to build an income-generating capital base. Until you have this, there is no hope of achieving financial freedom. It is important to remember that if your savings are not getting a return of at least the inflation rate then, in inflation-adjusted terms, your capital is actually shrinking. If you cannot beat the inflation rate, then you cannot afford to stop working – because the moment you do, the value of your capital will begin to decline.

Your second objective is to make your money work for you so that it beats inflation by a healthy margin. If you believe in the old adage "Make your money work for you", you may be interested in finding out where it will "work the hardest". The simple act of saving money each month is a big step in the right direction, but the long-term returns between one investment choice or another can literally mean a small fortune to you.

The next is to decide who is going to invest your money. Experienced investors with substantial cash reserves may want to invest directly, while less experienced investors may seek the aid of professional financial advisers. Our philosophy is that no one cares more about your money than you do and therefore you need to gain more knowledge about successful investment and take control of your own financial future. Regardless, acquiring as much information as possible is essential. So, our last objective is to show you where to invest for the best returns.

Traditional Investments

Determining a suitable mix of investments is one of the most critical investment decisions you will make. The choice is fairly wide, ranging from a second property to property syndicates, unit trusts, share market investments, fixed investments, endowment policies and retirement annuities. Let us briefly consider the income and capital return prospects of these commonly held traditional investments.

Savings in a Bank allows you to earn interest on your money and provide peace of mind. Savings offer you a reasonable income yield, usually a few percentage points below the prime interest rate. Interest is fairly assured if one is invested in a major bank. However, after tax, the yield will not be much above the inflation rate. Unlike shares or property, there is no risk that your capital will be eroded by negative returns.

Insurance Products - In life, it is said, that you have two major risks: you can either die too soon or live too long. For the first you take out life assurance, while you put money away for your old age for the second risk. This is called retirement planning.

  • Term Assurance is a way of getting the biggest cover for the least outlay. You will not get any money if you survive the term. Term assurance is taken out by paying a fixed premium for a certain period of time which provides you with a certain life cover. Bond assurance, for instance, is a form of term assurance which is widely used.
  • Endowment Policies give you the best of both worlds. You pay premiums for a certain number of years and if you live until the end of the period, you then receive the sum assured. If you die while you are still making contributions, the money will go to your heirs. Endowment policies are very popular in South Africa but the historical returns on these investment products have been very dismal, especially after taking all the costs into consideration. Endowment policies come in all sorts of forms and for all sorts of purposes. Education policies are an example, mainly due to the escalating cost of education.
  • Pension and Provident funds are largely the same thing as both exist to provide an income for people when they become too old to work. Such a retirement income is accumulated while the person is still working. Every month an amount is paid into the fund (usually a percentage of the employee 's salary) along with a similar amount contributed by the employer. Virtually all pension funds are operated on a Defined Contributions basis and the portfolios are market related. The increasing average age of South Africa 's population means that the onus will increasingly fall on individuals to fund their retirement. The responsibility has shifted to the individual 's shoulders, who in most cases, has very limited knowledge about the share market and their ability to handle their finances at an age when they will be at their most vulnerable.
  • Retirement Annuities (RA 's), as the name implies, is an investment product geared towards retirement and is a potential lifeline for later life. It was originally introduced in 1960 to encourage self-employed people to make provision for their old age. The philosophy was that by providing a tax incentive, people would put money away, thereby relieving the government of possible liability in the future. While RA 's are ideally suited for self-employed and professional people, it is also used by salaried people to supplement other retirement provisions that they are making. Retirement Annuities have become popular with many people who want to obtain tax relief on their contributions, but forget that the primary purpose of the retirement annuity is to provide a retirement income. Once a person realises that the pension or provident fund from their employer is not going to be enough for their retirement, they may decide to supplement their future income with retirement annuities. The advantages of retirement annuities are:
    1. Contributions to RA 's are normally a disciplined way of saving. While contributions can be stopped at any time, the money stays locked until age 55 at the earliest.
    2. RA contributions are tax-deductible from income up to a certain limit. The higher the marginal tax rate, the greater the advantage. In addition, the pay out on RA 's is also tax-efficient at retirement.
    3. An important benefit that is often overlooked is that RA funds are fully protected against creditors, even in the case of insolvency. However, in contrast to other types of investments like endowment policies and unit trusts, one cannot borrow money against RA 's or use the built-up capital as collateral.

Without almost any exception, retirement annuities are "sold" through Assurance Service Providers. There are enormous upfront costs on these traditional plans with virtually no transparency. The historical performances of the funds have also probably the worst record in the investment market. Pension Funds and Retirement Annuities (RA 's) can be channelled through unit trusts and achieve far greater returns on contributions paid, by taking advantage of the fluctuations in the share market.

Property assets include all types of real estate such as residential, commercial and industrial. For many people, a home is their biggest investment. A diversified investment portfolio should include exposure to property. Property investments can be made directly, through syndicates or through property unit trusts (PUTS). Volatile share markets and low interest rates have led to a surge in residential investment properties in South Africa. An investment property can generate income in the form of rental income in the short-term (but like interest, is taxable), with capital growth over time. Buying a second property as a source of income, especially during the early years of your retirement when you are still healthy and strong, is a good idea. Be aware that real estate incurs large up-front costs such as stamp duty, insurance and legal fees. Also remember that, unlike shares, you cannot liquidate a portion of your property if you need access to funds.

For commercial property (e.g. shops or offices) the income yield per annum is between 8% - 14% depending on location and quality. Capital appreciation varies but this has been of the order of 9% - 11%. Thus the total return has been around 18% -24% per annum for good properties. Income is fairly secure if one has good tenants, but there is the risk of no income if a building stands empty. The above figures are historical, as a lower inflation rate will result in lower returns. Furthermore it implies a well-diversified property portfolio.

Property generally outperforms savings over the medium to long-term; however, it also exposes investors to higher risk. There is the possibility of rising interest rates. If you decide to buy, choose your location carefully. The adage about location, location, location holds true. Well-located property in popular areas, such as the inner city in Cape Town or beach destinations, will continue to be an excellent long-term investment. Check that the area is well serviced by schools, transport and shops. And remember that newer homes or apartments are cheaper to maintain. If you are investing in a unit, body corporate fees can vary dramatically from property to property. Swimming pools and lifts add significantly to management costs. Buying off-plan properties that require deposits well in advance of construction increases the risk.

Unit Trusts provide an economical medium for the average investor with relatively small amounts of money to invest and who does not have the time and expertise to "play" the share market to have access to professional advice and diversification of investments. Unit trusts are designed to permit an unlimited number of investors to pool their resources as unit holders in a fund that in turn invest in a number of investment instruments (e.g. money and capital markets) under the supervision of a professional portfolio manager. By means of either a single lump sum investment or a regular monthly investment, it is possible to participate in the inflation-beating returns that have been offered by most unit trusts over the last 25 years. Each unit trust fund has its own specific investment objectives, which are described in the fund 's trust deed. These objectives are typically described in terms of one or more main objectives:

  • General unit trusts – invest in shares over a wide spectrum of sectors of the Johannesburg Stock Exchange. This ensures diversification. Stable medium and long-term growth is obtained.
  • Specialised unit trusts – invest in specific sectors, such as gold or industrial shares, because of their faith in a sector or sectors (e.g. information technology or financial services). The risk and return of these sectors could be higher than for general unit trusts.
  • Income unit trusts – invest only in fixed interest-bearing instruments such as gilts (bonds) or semi-gilts and debentures. The safety of the investment amount plus interest is ensured. Individual investors who invest in these unit trusts are usually those with an objective of high income (as opposed to capital growth). These types of unit trusts could be more suitable for retired people, as well as for people who have a short-term investment objective.

Some of the other advantages of unit trusts are that they can be linked to an endowment policy, mortgage bond or retirement annuity. Secondly, they are a very liquid investment as you can get you money back within days. Thirdly, they are a very visible investment as you can track the performance of your investment on a daily basis. The disadvantages of investing in unit trusts are that many investors are tempted to take profits every time the share market booms. This can undermine the long-term investment objectives. Secondly, the costs are higher than a direct investment in the share market. Thirdly, the unit trust industry is governed by regulations that can inhibit the long-term growth and lastly, the investment returns on unit trusts are not guaranteed.

Derivative Instruments cover warrants, Contracts for Difference (CFD 's), Single Stock Futures (SSF 's) and futures and options on various financial instruments, and assets such as the underlying shares, share indices, and bonds are traded. Using derivative instruments, portfolio managers as well as individuals and other interested parties, may hedge against share price volatility, interest rate risk and foreign exchange or currency risk. Derivative markets were initially created to allow investors to "hedge" or protect the value of their investments from future price fluctuations. Derivatives allow investors to protect themselves from the risk that market prices will fall. Derivatives can also be used as an aggressive investment strategy. The speculative use of derivatives offers much higher returns but with higher returns comes higher risks. The higher risk investors are encouraged in this in order to contribute liquidity and depth to the markets. Investors can lose more money, more quickly if the market moves against them. Derivatives can become a complicated and sophisticated investment strategy and, therefore best left for the more experienced and sophisticated investor.

Direct share market investment has always been very good to investors and is a proven way to building wealth. Shares are relatively high-risk investment over the short-term, but over the long-term term, shares have generally provided a tax-effective and growing income stream that has performed above the rate of inflation historically. Share prices can fluctuate for reasons ranging from company developments (such as profit reports), economic changes (such as interest rate increases) and international conflict (such as wars and disasters).

Income is in the form of dividends. The yield is around 3% per annum and it is not always assured. It is likely to be received only if the company has earned profits. The prospect for capital growth is high – in the order of 15% - 25% per annum over the last 10-years or so - quite a bit higher than compared to cash, property and bonds. Dividends are not taxed and only capital gains over the first R10 000 are taxed if you are not deemed a "trader" by the Revenue Services (SARS). The individual investor should decide, within the context of his own financial situation, the kind of investment he wants to make based on his own financial objectives. Once a potential investor has evaluated his current financial situation, his risk tolerance and personal objectives, he can proceed with his chosen investment, based on this evaluation.

The rapidly changing investment environment has necessitated a more dynamic and proactive approach to the share market, in order to enhance capital growth at an acceptable level of risk. The further you are from retirement, the more you should be investing in the share market. You will not need that money for a long time; so, you can benefit from the superior long-term performance of the share market while not having to worry about the effect of market cycles. You may recognise that the long-term odds are overwhelmingly in your favour. We know the market shifts every day, sometimes sharply downward. That can be absolutely gut wrenching when it occurs, but history shows us that the inexorable pressure on the share market is upward. The biggest bang for your buck will be found in shares. So opt for shares above all else as your vehicle of choice for growth over the long-term.

A happy retirement

Obviously, if you have achieved financial freedom and built up enough capital, you will most probably have achieved a happy retirement. But, what does the word "retirement" mean to you? Do images of carefree days doing what you 've always wanted to do come to mind? Travelling to exotic places perhaps, or playing golf, or doing some woodwork, farming or whatever? Sadly though, retirement for most people does not turn out to be a very joyful period. Only a small percentage of people are financially prepared for retirement. For them it is a time to "pluck what has been planted." For the rest it is a race against inflation and death. All of us, unless we die prematurely, will have to retire one day, regardless of how old we are now, or what position we hold. According to current life expectancy statistics, a man who retires at age 60 today can expect to live, on average, for 15 more years while a woman is likely to live for another 19 years.

Due to improved health care life expectancy is steadily rising. A young person starting work today will find that by the time he or she retires 40-odd years in the future, people will be living for much longer. This makes retirement planning at an early stage even more vital! It is a tragedy that such a large percentage of the population does not build up sufficient funds for retirement or pay attention to the other aspects of retirement planning. The following information, from a survey done by a large insurance company, highlights the situation. The survey found that out of 100 people now aged 25, in 40-year's time from now, at retirement age of 65:

  • 34 people will already have died through old age and car accidents, etc.;
  • About 10 people will be on state pension;
  • 20 people will still be working;
  • 30 people will be financially dependent on their families;
  • Only 6 people will be financially independent.

In which category would you like to fall into one day?

The category into which you will fall when you retire will depend on your planning - or lack of it - during your productive years. Planning for retirement is important not only for those who are on the verge of retirement or who have already retired. That would be too late. Indeed, the earlier you start planning for retirement, the easier it will be and the better the results and your chance of retiring in financial comfort.

Imagine retirement planning is the same as planting a tree. The sooner you plant the tree, and the more water and fertiliser you feed the tree, the bigger it will grow. You cannot plant a seed two years before you retire and expect to have a large and flourishing tree by the time you retire. If you intend to sit in the shade of a strong oak tree with deep roots one-day, you have to plant the seed early in your life. The longer you wait the smaller your tree is likely to be.

Financial planning means deciding in advance what goals you want to achieve, and what steps you should take to reach these goals. Put another way: decide where you want to be and how you want to get there. Think of life as a journey in a foreign country. Without a road map and a final destination, you are likely to end up in the wilderness. This is where most people end up as far as retirement is concerned. A happy and carefree retirement should be your destination in life. Think now about your retirement. When will it occur - 20 years from now, five years, tomorrow? If you are close to it, or are already retired, how long must the money last? Now think about your retirement investments. Is the bulk of your money positioned for long-term growth (i.e. shares) or short-term stability and income (i.e. bonds)? The mix you have in these instruments is something you must decide for yourself. After all, you're the one that has to sleep at night. Recognise, though, that investing for retirement is a long-term goal. Hence, you truly want to shoot for the best growth in your investments that you can get. That won't be found in bonds over the long haul. If you elect to keep most of your money there, almost assuredly in retirement you will be eating franks and beans for dinner because you have to, not because you want to.

Recognise, too, that you probably still have many years of productive life ahead of you after you finally do retire. While bonds may appear appealing for the income and safety they provide, half or more of your portfolio must still be invested for growth to ensure you can maintain purchasing power. Average inflation for the past 10-year period has been about 12% per year. At that rate, the cost of all we buy doubles every 6 years. To a retiree living on a fixed income, that can be nothing short of devastating. Hence the need for growth in a retiree's portfolio.

The lesson of this step, then, is to avoid overly conservative investing, both now and after you retire. Too much safety can be costly to your financial health in retirement. If you are a unit trust investor (and most pension and provident plan participants are), focus your attention on general equity funds. Compare their records over time to that of the JSE All Share index and each other. For 5-and 10-year periods, most funds' performance will be below the market. In a company plan, though, you would not have much choice. Use the fund that performs closest to the JSE All Share index average.

In the PSG Securities Ltd Trading Course, we discuss the best ways the share market will help you achieve the income levels required to meet your retirement needs. Before you start planning, you must be sure of your goals. Goals can be established by answering the questions "What?", "How much?" and "When?"

To summarise what you must do to enjoy a happy and carefree retirement:

  • Start building up adequate alternative sources of income, so that you will be able to maintain your standard of living after retirement.
  • Evaluate various lifestyle alternatives and make provisions so that you will have a comfortable dwelling and maintain a comfortable lifestyle during retirement.
  • Decide well in advance how you are going to keep occupied and how you will handle the sudden increase in free time.
  • Live in a healthy way so that you can enjoy good health as long as possible.

Now that you know what you must plan for, you should formulate your own goals. It is a good idea to write them down as systematically as possible, for the following reasons:

  • It will help you focus on them;
  • It will help you set a time-frame in which to achieve them;
  • It will motivate you to plan the necessary steps to reach them; and
  • It will help you to measure your progress in reaching them.

You will need money to achieve some of these goals. It is therefore important to calculate in good time how much it will cost you to achieve them. This will enable you to start putting away the correct percentage of your monthly income to build the necessary funds. But how much is enough capital for a happy retirement? Pundits say you will need 60% to 85% of your gross household income today to sustain the same lifestyle after you retire. In theory, the higher your income today, the closer you are to the lower end of that scale. Fair enough, but let us look at this issue in a slightly different fashion.

Sure, we could sit down to a long, drawn-out process in which we look at our expenses and try to anticipate what they would be in retirement. But why bother? After all, retirement is a long way off, and we have no real idea of what those expenses will be then. You do, though, know that you live comfortably today (we hope) and that it is unlikely you will be saving money or paying taxes (unless you choose to work) after you retire. Therefore, excluding those items from your gross income, you can come up with a number that's fairly close to what it would take to sustain your current lifestyle. Simply put: Investors want a retirement income that equals their gross income today less all savings and all taxes.

But you still have to decide what income you will need in retirement to live the way you want. Some people can get by on much less than they use now, while others may decide they want more. It's a personal choice for all of us. So, pick a number. Now, let us talk about inflation. How much will our retirement savings have to be in the year we retire after it has been adjusted for inflation over the years between now and then? What should that inflation rate be anyway? For how many years will we draw that income? Should it keep pace with inflation throughout those years? Will we draw down our starting retirement portfolio to support our income needs or just live off the earnings while never touching the principal? If we can answer those questions, then we can determine the starting portfolio we need at retirement to support us for the rest of our lives. To do things right, we must take a cold, hard, objective look at our desired income, subject it to a rational choice of assumptions, and make some detailed calculations.

An American diplomat once said: "Behold the turtle. He makes progress only when he sticks his neck out". He knew that cracks along the sidewalk would trip up the turtle from time to time. But the one who finds a comfortable pace and keeps his eye on the horizon will go places. In our investing analogy, those cracks represent market risk. And in our retirement planning we recognise that we're going to have to cross them to get anywhere.

Market risk (the chance you will lose money) and reward (the chance that your investments will head skyward) travel hand-in-hand in the daily marketplace. The greater the risk, the greater will be the potential return for taking that risk. Equally true is the potential for loss, which quite handily explains why taking that risk should pay a greater reward. By and large, however, risk is pretty much a short-term phenomenon. That's particularly true in the share market, which many regard as a quite risky investment.

Wealth, health and happiness

Most of the benefits of successful investing are obvious: while you're still young enough, sports cars and fancy holidays; later on, great healthcare opportunities. But, what about living longer? There does seem to be a positive correlation between being a great investor and living a long life.

Irving Kahn (born December 19 1905) is a value investor with over 77 years in the business. As chairman of Kahn Brothers Group, the firm he founded with his sons in 1978, he still performs an active role at the age of 104.

Phil Fisher (September 8 1907- March 11 2004) died at the age of 96. Best known as the author of Common Stocks and Uncommon Profit, Fisher was a pioneer of growth investing.

Sir John Templeton (November 29 1912-July 8 2008), the great philanthropist, died at 95. British- born Templeton pioneered mutual funds in the US.

Walter J Schloss (born 1916) is 93. Initially hired as a runner on Wall Street in 1934, he took investment classes with Benjamin Graham before going to work for the Graham-Newman Partnership. In 1955, he started his own firm, where he beat the S&P by 5% a year for almost five decades. Schloss stopped actively managing money in 2003.

Charlie Munger, at 86 (born 1924) is probably best known as Warren Buffett 's sidekick. Munger still co-chairs Berkshire Hathaway 's meetings with Buffett, who is himself 79.

Benjamin Graham (May 8 1894-September 21 1976), the father of value investing, died at the age of 80. Jim Slater, aged 80, probably best known for the Zulu Principle, has made several fortunes.

George Soros (aged 78), initially a nearly penniless philosopher, started running hedge funds in the late 1960s. Today, his $11-billion fortune makes him the world 's 29th-richest man.

But, is there anything to suggest that being a successful investor brings with it the added benefit of living longer? There may be.

Firstly, people who are happier and what could be more fun than succeeding in something you love doing, have been shown to live healthier, longer lives. Secondly, there 's the mental stimulation. By all accounts brain training exercises slow the degeneration of the brain. And what could be more testing than trying the impossible - consistently, beating the markets? Thirdly, there 's eustress. The flipside of distress, eustress is a form of positive stress, often associated with achieving life goals. Finally, lifelong exposure to the stock market roller coaster might provide a form of resilience - both physical and mental.

There are other possible explanations of course. Success in investing could be a consequence of a healthy body and mind, rather than a cause. Successful investors can better afford to look after themselves. Old rich investors could be a red herring. Or it could simply be that it takes a very long time to succeed in the markets.

Plan of action

Plans are just that - plans. As such, outside influences, over which we have absolutely no control, can cause them to go astray. When that happens, we must go back to the drawing board and repeat the steps to get us back on track with our financial objectives.

Your plan might not fail. In fact, it may work gloriously. Are you then home free? The surprising answer is no. All the information we have dealt with here is primarily with money issues. They really fail to address those facets of retired life that have little to do with finances. Therefore it is important to reflect on the personal issues of retirement. Think about it. You know what the personal issues are. When you no longer work, you have loads of time to fill. When the golf game or fishing gets boring, what takes its place? We have many social contacts during our working lives with our co-workers. Who takes their place to fill our basic human needs for companionship and social interaction? One thing's certain: a couple, no matter how devoted to each other, cannot spend 24 hours per day, day in and day out, in the exclusive company of one another. Both need outside interests and companions.

There are other quality-of-life issues such as:

  • Housing and its location;
  • Physical health maintenance;
  • Availability of community services;
  • Work (volunteer as well as compensated);
  • Educational interests, and
  • Leisure pursuits.

These issues will define our life and our happiness in retirement. Money is the tool that keeps us comfortable, but these are the factors that make us who we are. They determine how we live and react during our existence. One-third or more of our lives will be spent in retirement. Therefore, to enjoy those years, we must give these "emotional", largely non-financial factors more than passing consideration.

Retirement: it is that time of life at which we have gained sufficient experience to lose our jobs. Or, put another way, we want to amass enough resources so that in retirement we may say, "I wake in the morning with nothing to do, and by bedtime I only have it half done." We prefer this definition: "Retirement is being in the financial position where you can comfortably live off your investments and have the freedom of time to do what you want to do, with whoever you want to do it with and whenever you want to do it".

Financial literacy

You are best qualified to look after your own money!

Many people find investing in unit trusts very attractive in that they require no thought. Once your stop-order is set up you can more or less forget about the whole problem. In America this type of service is called a "no-brainer". The philosophy is similar to that suggested by the enforced saving of endowment policies. You are paying someone else to think for you. Perhaps it is time to identify a rule of life, one that you actually know, but perhaps have never put into words: "You can only make money from things that you understand well and where you are actively involved". Consider your profession. You make money there because you really understand the work and you are actively involved in it every day. In the same way, you will make money from the share market once you understand it and when you become involved - not before. Could you achieve success in your career by appointing someone else to do your work while you yourself remained uninvolved and ignorant? There is no "free lunch" in this life. You cannot expect to make money from something when you are both passive and ignorant of it.

Invest first in your education, then in the share market.

Understandably, many investors want to be involved in the process of investing directly in shares and learning more about the share market. But it does take time and many hours of study before you will be able to manage your own portfolio. The simple message from this lesson is that you cannot expect to make money from your investments unless you are prepared to take personal responsibility for your own financial affairs. This implies that:

  • You need to educate yourself in the art of investment. Get as good an education in investment as possible by studying investment principles such as fundamental and technical analysis, as well as portfolio risk management and reading as much financial articles as possible. Apart from one 's health, the best investment anyone can make is an investment in oneself. Investing on one share market is very much the same as investing in any other share market in the world as the same investment principles apply. Investment education is an investment that is totally transportable and can never be taken away.
  • It implies that one obtains access to the information necessary to follow what is happening on a day-to-day basis. However, the developments in software programming, as well as the increased ability to communicate with the share market, have made this much easier for the private investor.
  • It further implies that you need to understand the fundamental principles of financial statements and to make those financial figures meaningful to yourself. Literacy is the ability to read and understand words. But what is meant by financial literacy? It is the ability to read the financial reports of a business and know with confidence what the numbers are telling you, where they come from and what they might hide. It is also about knowing how numbers may be manipulated to tell a story that differs from the financial reality of the business.


Money is bound to play an important role in most people's lives, whether they like it or not. Retirement planning starts with the very first salary cheque. Whoever thinks of retirement when their life is stretching out ahead of them? But the sooner one starts thinking about it, the less traumatic the retirement experience will be in the long run. Young people need to be taught how to get into the savings habit as early as possible.

Gone are the days when one can formulate a financial strategy and forget about it as markets change almost daily. Successful money management needs continues updating. Financial planning is going to require an almost fanatical obsession with financial, economic and political news. It might be simple, but it is not going to be easy.

Learn to take calculated risks. The younger one is when a risk backfires, the easier it will be to bounce back. The older one gets the harder and less advisable it becomes. Young people often tend to be idealistic about money. While there is nothing wrong with that, a careless attitude towards money can cause a great deal of hardship later in life, quite needlessly. Accept that you are living in a materialistic world but learn to use money to your advantage. Applied correctly, it can enhance one's life. But do not let it dominate your life to the exclusion of all other enjoyment. Control money; do not let it control you. Now, that is smart money management!

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