A few months ago I was driving through some well-known small towns on my way to the North. But with all the new town names, at one stage I no longer knew which town I was in, and suddenly wasn’t sure which way to take. I first had to quickly turn on my GPS, before I sheepishly found the right road again – which I actually know very well!
It reminded me of people’s personal finances. We all know more or less what the right “path” is, but things have changed so much that sometimes we no longer find it. The core of the problem is that we sometimes still drive with old “road maps”, but that the upheavals in the financial world can easily lead you astray. Let’s be honest: with grandfather’s and father’s road maps you will easily get to a place where you don’t want to be. And if you drive without a GPS road map, you will never reach your destination.
Most people have financial dreams and nightmares, which are really just two sides of the same coin. Everyone dreams of financial freedom, but is also sometimes plagued by financial nightmares. The reason is easy to understand. Many people are just a paycheck or three away from financial disaster in these expensive times. Any person who loses his or her job in this economy is immediately in crisis. But this does not only apply to working people. Many pensioners have had to realize to their shock that they have too little money to live on, because the world has changed.
Before a road map to financial freedom can be drawn up, it is important to first know what financial freedom is. Then we can look at what has changed so much that the road is now more difficult, so that we can draw up our own road map for the future.
Financial freedom is when the income from your assets is more than your expenses.
It’s a tough uphill road for everyone to get there, and most people are happy if they reach it by retirement. But with a good road map that is followed exactly, it is possible. First, let’s look at the twists and turns on the road to your destination of financial freedom.
The first important upheaval is that the new generation of pension funds are really just savings funds, and that as an employee you bear the full risk if your money runs out.
Most of our parents had pension funds where the employer bore the risk, and guaranteed a lifelong pension benefit. This contributed to relatively low interest and ignorance in and about pension matters, because the employer bore the responsibility for retirement provision.
In the new “fixed contribution” pension funds, your money consists of your and the employer’s contributions and the growth on your money. It’s not necessarily worse, you just have to know that it is now your responsibility to keep a good eye on the road. You drive yourself, and no longer drive in a “pension bus” driven by the employer. That is why a “license” is important, in the form of financial literacy and training.
The second change is that people live on average about 10 years longer than their grandparents, so your money should last longer. We certainly cannot expect our pension to last longer than we save for it! Along with this, the cost of elderly care has risen greatly, because there are practically no more subsidies for nursing homes.
The third change is that the cost of medical is much more expensive, and that almost all employers have abolished retirement medical and shifted the costs to employees.
The fourth change is that the return on investments has decreased a lot, and that you will have to save more to be able to get the same pension. Old Mutual has calculated that where the average return on investments over the past 60 years has been 7.3% above inflation, in the future this could halve to just 3.7%. The challenge is that you don’t have control over the return or future living costs, but only over how much you can save.
The fifth change is that living costs have become so expensive that research from Nedbank and Unisa has shown that a full 75% of households today are financially unhealthy! This makes it extremely difficult to get by with your money, let alone save extra! Moreover, many people are part of the “sandwich generation” – they have to help their children and their parents to keep their heads above water.
Destiny of freedom
If you’re going on a long trip, you don’t drive without checking where the destination is, how you’re going to get there and whether your vehicle is in good working order.
So much more the path to your own financial freedom. This is so important that it cannot be left to chance or just to your employer’s pension fund. That is why everyone should get a reliable financial advisor as a “GPS” to help you with your personal road map.
The first step is to determine what financial freedom means in your personal case, because it is the destination of your journey and will determine the route of your road map. For most people, your first pension check should be about 75% of your last salary. This is called the salary replacement rate. This is not an easy goal in light of the five upheavals mentioned above, and is the financial version of climbing Kilomanjaro or running the Comrades.
It requires a clearly defined goal, a clear road map, thousands of small steps, short-term sacrifices and lots of determination to reach the peak. Just remember Langenhoven’s words: “Don’t buy what you need, buy what you can’t do without!”
Road map to freedom
Everyone’s circumstances are different, and therefore everyone’s road map will look different. Professional planners will be able to help with that, almost like coaches have to assist athletes or mountain climbers. But there are some general rules or milestones that apply to everyone. In a nutshell it is:
- a budget that must be followed as disciplined as an exercise program;
- to give out less than you take in;
- the hardest is cutting expenses to save extra;
- prevent your expenses from rising as much as your income;
- buy assets such as a unit trust rather than expenses such as cars;
- make use of tax concessions on pension funds and other products;
- take a close look at your personal well-being such as eating and exercise habits;
- improve your qualifications to increase your chances of greater income;
- try to work as long as possible or get extra earnings;
- keep yourself informed by reading good sources;
- bite the bullet and be patient, there are no easy shortcuts.
It’s important to check your financial GPS at least once or twice a year to make sure you’re on track to your goal. Make timely plans where necessary. Don’t look all the time, instead keep your eye on the road, but monitor the progress at least annually. Also remember that roads have uphills, downhills and sharp turns.
Hang in there, because as long as you keep going and persevere and persevere, you will arrive safely at your destination. Good luck with the trip!