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Here’s something an investment whiz would never tell you: you could do his job – and be just as successful at it. The same rules that help him close multi-million-rand deals can help you build a million-rand retirement. • I’ve learnt these tenets by spending the past two decades as a financial advisor, helping real people increase their supply of real money. I’ve watched the ebb and flow of the stock market, the emergence of the provident fund, the credit boom and crash. A lot of people lost a lot of money as the indexes gyrated, but not everybody. The people who avoided disaster did so by embracing a few simple ideas. Collectively, these maxims can mean the difference between the penthouse and the poorhouse. • In a perfect world, you’ll adopt these rules while you’re in your twenties, and stick to them until you die (rich). But even if you start in your thirties or forties, you can still retire in style; you’ll just have to follow the rules a little more, well, vigorously.
Be paid what you’re worth
Maximum pay. You want it, and that’s okay – you might even deserve it. Follow these rules and it’s yours.
Insist on a decent living
In real life, “decent” is a sum high enough to pay your bond or rent, invest in a family, put petrol in a car that’s not a skedonk and take an occasional holiday. Oh, yes, and save at least 10% of whatever you’re bringing in (including saving for retirement and education, and your emergency stash. More on these later). Remember: once you earn that decent living, making more money will not make you happy. But making less will make you miserable.
Know your true value
Are you worth more than what you’re earning today, or less? If you’re not sure, that’s a huge problem. If you’re underearning, you’re losing money every day you’re not asking for more. If you’re overpaid, you’re ripe for the chopping block, and you’d better update your skills or improve your productivity. Ask a colleague at a competing firm, “What would someone with my skills be paid at your company?”
Check out the competition
If you’ve been at your job more than a few years, chances are you’re underpaid. According to a global study, salary increases hit historic lows in 2009. Results from the 2010-2011 Culpepper Salary Budget & Planning Survey reveal that average global base salary increases across all jobs and locations are projected to jump from 2.59% in 2010 to 3.14% in 2011. Who did receive a good raise? The guy who jumped ship. Someone else recognised his value. You can do the same, but note: this gambit works best if your last performance evaluation was stellar and if taking the new job is something you’re actually willing to do. Then it’s the best way on the planet to earn a raise.
Use the four most powerful words i any negotiation: “Can you do better?” You’re on the phone with the cellphone company, at the mechanic’s having an oil change, talking to your bank manager about your home loan. Don’t commit – at least not until you ask, “Can you do better?” It’s the perfect haggle. You sound as if you know there’s wiggle room and you’re willing to let him work his magic.
Know when to settle for good enough
When an opportunity seems good enough, take it. When university researchers surveyed job-hunting graduates, they found that those who searched for perfection generally did land jobs paying 20% more. Unfortunately, they didn’t like those jobs. That makes sense: if you’re looking for the ultimate opportunity, then the one you eventually take can’t help but fall short. The not-so-picky students were happier with their jobs. The same applies to any big purchase. Spend days searching for the best flat-screen TV and you’ll always doubt your choice. Find one in a few hours that fits all your needs at a decent price? You’re going to love it. It’s just the way we do it.
Save on a schedule
The house, the even better house, your kids, your kids’ education, their weddings, your days of relaxation, the legacy you leave. Life is expensive. Here’s how to afford it.
1. Pay your savings first
Every time you’re paid, aim to save 10% of your gross earnings off the top. That means before you pay the bills and before you pull cash from the ATM. Fifteen percent is even better. Even if you can’t hit 10 or 15%, make saving a habit. Every cent counts, no matter where it goes – your emergency fund, your retirement kitty, education savings account, your house fund. When those savings accumulate, you’ll be inspired to set aside more.
2. You have more control over your nest egg than you realise
Don’t focus on stock market returns. You can’t control them. What matters more is the year you start saving and the amount you save. How so? According to financial coach Gregg Sneddon (www.thefinancialcoach.co.za): “By investing just R500 per month from your mid-twenties, with inflation linked escalation and five percent real return (that’s five percent better than inflation), you should end up with about R4.3-million by the time you’re 60. Your final contribution will be about R3 600 per month. If you start 10 years later you would need to put away about R1 700 a month to get to the same point by 60 and your final contribution will be about R6 900 per month.” Maximise savings now!
3. It’s easier to save if you know what you’re saving for
Immediate financial gains light up the reward centres in our brains; waiting for tomorrow, not so much. That’s one reason people are so lousy at saving. You can make it easier on yourself by visualising what you’re saving for. It’s not retirement – it’s the villa on the beach on the North Coast.
4. Set the bar where you can clear it
Another big reason people fail in their efforts to save: overly ambitious goals. Don’t shoot to save R10 000 in a year; aim for R100 a week – and then find the money. You’ll get there before you know it.
5. Know what your time is worth
Figure out your hourly rate: remove the last three zeros from your annual salary and divide the remaining number in half. Use this to decide when it’s okay to hire others and which tasks aren’t worth doing. The toilet is broken. Do you attempt it yourself or call the plumber? If you do it yourself, it might take an afternoon, while a plumber will charge about R500 for his call-out fee and an hour’s work. Depending on what you’re worth (and how good your plumbing skills are), it might be cheaper to call out the plumber. Do the maths and don’t sweat the small stuff.
Spend Less than you make
The December 2010 report released by the National Credit Regulator showed that there are just over 18.5 million credit active consumers in the country. And of these, 46% (just under nine million) are not in good-standing. That’s a euphemism for being three or more months behind with their repayments.
Cash is king. You’ll spend more if you pay with a credit card than with a debit card, more with a debit card than with cash and more when carrying small denominations than big ones. Why? The big ones are psychologically tougher to part with. “When you swipe your credit card, there is no emotional attachment to the purchase – you don’t feel it immediately. In fact, think back to the last time you swiped your card… what was the amount?” asks Sneddon. “Now imagine if you paid with cash and had to take R1 500 out of your wallet (which you had to draw from the ATM). I bet you would think a bit more carefully about whether or not you actually need everything that is in the trolley.” So stock your wallet with R200 notes, pack your lunch and call it a day.
Good debt is cheaper. Good debt puts a roof over your head, wheels below your feet and
a diploma on your wall. But the grey area between good debt and bad is wide enough to slide your new refrigerator through – because after all, you’ll need a new fridge if the old one goes kaput. Try to use emergency savings to finance these purchases, and then replenish those coffers over time.
You’re nothing but a number. Your credit score is an important barometer of how responsible a human being you are. Protect your score – and qualify for lower interest rates – by paying your bills on time, not using more than 30% of your credit limit, not applying for new cards for the heck of it and not closing cards even if you’re not using them.
All debt is expensive. When you take on new debt, even at zero percent, you’re making a commitment against your future income. What could you have done with the R2 450 a month you spent on the
second car? Over a month, not much. But over 60 months?
Shop with a list. According to the folks at Personal Finance, we waste up to 30% of our salaries
on items we don’t need. That’s rent. Or a car payment. Before you buy anything that isn’t on your shopping list, ask yourself: why am I doing this? You’re in a bad mood? You had a fight with your girlfriend? Understanding your motivation may help you walk away.
Invest what you don’t spend
Congratulations! You earn good money and you’ve treated it well. Now it’s time for your money to start paying you back.
Give it time. Financial coach Gregg Sneddon advises that you should try to forget about your investment values. “Research shows that the more often you look at your investments, the less likely you are to stick to your long-term plan as it becomes too easy to focus on the short-term volatility,” he says. Unfortunately legislation requires that companies report frequently. Combine this with the ability to access the values online and the absolute glut of information by so-called experts and it becomes too easy for investors to be distracted from their plans and to make decisions based on the short-term “noise”. “I recommend that if you are an investor (that is, that you are in it for the long haul) and you have an investment strategy in place, then you need to learn to forget about your investments. Give them time and they will come right.”
Automate There’s a very good chance you’ll run out of money during retirement. Cut your odds: automate your investment contributions, and increase your percentages with every pay raise. If you’ve never saved before and money’s tight, start with three percent and then increase your contribution by two percent a year until you max out at around 15%, in your mid-30s. If you’re approaching 40 and you still haven’t started, you’ll need to suck it up and supersave. Start with 10% until the pain subsides (it will!) and then ramp up to 15%.
Schedule an annual check-up. Seven out of 10 investors don’t rebalance their retirement plans every year. Why is this a problem? This year’s winners are rarely next year’s winners. Say you have 25% of your portfolio in international stocks, which are so hot that they make up a third of your portfolio’s value at the end
of the year. Do you really want a third of your nest egg riding on the economies of Eastern Europe? Move some of that money back into different shares, bonds
or even cash. If you need to, call on a good financial planner to help you.
Realise that you stink at investing. It’s biology. Your brain’s amygdala, which is responsible for emotions and fear, dreads losing money more than it enjoys making it. And so you hang onto tanking shares way too long. The solution? Build a boring portfolio. Set it and forget it.
There is no financial aid for retirement. Ideally, your fancy salary would fund retirement and university for your kids. Most parents’ salaries can’t. There’s plenty of financial aid for varsity. So help your kids as much as you can, but not to the detriment of your own retirement. Otherwise you’ll end up living with them, and that will suck.
Protect yourself from catastrophe
Bob Dylan knew it: a hard rain’s a-gonna fall.Cover yourself.
If you can’t afford to replace it, insure it
If you can, don’t. Likewise, if people are depending on you for your income and wouldn’t be able to replace it if you died, buy life insurance. Single people with no kids generally don’t need life insurance.
Your heart will stop or the tour will grow
Think about the last person you know who was laid low
by cancer or levelled by a heart attack. Not too hard to come up with an example, is it? And every year, you’ll know more and more victims. This is why you must have medical aid, even if all you can afford is a basic plan to cover worst-case scenarios. Don’t be floored by unexpected medical bills. And go for check-ups regularly.
You must have three pieces of paper
1) A living will (which tells a hospital whether you want life support); 2) a durable power of attorney for finances (which gives someone else the ability to handle your accounts and your money); 3) and a will, because…
You’ll die, ,but your money will live on
It sucks to think about, but you must put your life in order for the people who love you. A will determines who gets your stuff and, if applicable, custody of your kids. You may also want a trust – a legal document that complements your will, ensuring that assets pass on smoothly. Trusts could minimise estate duty on your death and can ensure your kids don’t inherit too much too soon. It also ensures you leave a legacy
of good financial values