Households are facing tough times as rising costs are stretching already thin wallets, but now is not the time to take desperate measures such as entering ‘get rich quick’ schemes. Instead, the real secret to building wealth lies in your everyday spending decisions and financial habits, says the Association for Savings and Investments South Africa (ASISA).
Peter Dempsey, deputy CEO of ASISA, states that as July is Savings Month, now is the perfect time to look at practical ways in which you can achieve the wealth you need even though times are tough. He notes with concern a disturbing trend where many South Africans who are facing increasing financial pressures have become vulnerable to enticing stories of impossibly high returns offered by pyramid and Ponzi schemes.
“However, these schemes inevitably collapse, leaving investors with nothing. You must be careful to distinguish between legitimate savings and investment products offered by regulated financial institutions and schemes that make unrealistic promises where you could lose your savings without recourse,” he warns.
Dempsey adds that in the case of legitimate financial services products, the providers must be in a position to fully disclose what they do with the money entrusted to them by investors and how the product is administered.
He points to the recent furore following the ‘reset’ of MMM South Africa, the local branch of the MMM Global scheme founded by convicted Russian fraudster Sergey Mavrodi, where numerous investors’ funds were frozen.
“Unfortunately, there is no magical solution to achieving the wealth you need. The real path to riches lies in re-evaluating your financial priorities, and taking control of your spending each and every day,” he says.
He notes that the re-evaluation of your finances should begin with thinking about what wealth and riches really means, and managing your expectations.
“Measuring your wealth is not about owning the latest luxury car, technology or designer clothing. It’s about knowing that you will be able to live comfortably and independently for your whole life, and provide for yourself and your family no matter what comes your way,” he says.
With escalating prices and rising inflation, Dempsey offers some simple tips for you to begin taking control of your finances now to grow your riches for the future.
1. Live within your means
Dempsey says that the real reason you may not be able to save is that you are simply not aware of what you are spending.
“Most people have not accounted for those small everyday expenses which over time are tipping them into financial trouble, much like having a slow puncture on a car. In difficult economic times, you must understand exactly where your money is going through a detailed budget before you can make necessary decisions,” he states.
Once you have drawn up your budget, you need to streamline your finances by cutting back on wasteful expenditure and bringing your spending in line with your income, he says.
“While this seems obvious, South Africans are plagued by a culture of conspicuous consumption, continuing to fund extravagant lifestyles on credit,” he describes.
He notes that recent statistics released by the South African Reserve Bank (SARB) show that at the end of December 2015, the household debt to disposable income ratio was 77,8%. This means that for each Rand earned, nearly 78 cents was spent on debt.
“Often this debt is caused by a desire for instant gratification, but remember that with interest, items bought on credit will cost significantly more overall than had you waited to save enough money before buying,” he says.
He also points out that you need learn to distinguish between wants and needs if you are going to be able to maintain a healthy budget over the long term.
“Bear in mind that people who have enough in retirement spent less on daily cappuccinos, subscriptions, restaurants and expensive holidays, and channelled their money into creating meaningful wealth for the future instead,” he states.
2. Rid yourself of debt
With rising interest rates, the cost of expensive debt continues to grow. Prioritise ridding yourself of this debt in order to minimise its risk to your budget, says Dempsey.
“Having debt on your personal balance sheet is like having widening holes in the bottom of a bucket where your money keeps flowing through. You will be able to accumulate wealth and fill your bucket far more quickly once you have plugged the holes,” he explains.
He notes that one of the most effective ways to deal with your debt is to first prioritise repaying short-term debt with high interest rates such as credit cards, store accounts and car loans.
“Once this debt is repaid, turn your attention to long-term debt such as mortgage bonds, also utilising the money you have freed up on monthly short-term debt repayments,” he says.
He also suggests first channelling any salary increases or bonuses into repaying debt rather than funding new and expensive wants.
“Your home is an appreciating asset, which means it should grow in value over time. By repaying your mortgage bond more quickly, you are therefore essentially paying yourself in a more meaningful way for the future,” he explains.
3. Pay yourself first
Paying yourself first is very important maxim for adding to your riches, but it does not mean splurging on all the latest goods that catch your eye, says Dempsey.
“While not nearly as glamorous, paying yourself first means paying your future self first, and making sure that you have provided for unexpected life events such as death or disability, as well as planned events such as retirement,” he states.
He points to the ASISA 2013 Life and Disability Insurance Gap Study which calculates the difference between existing life and disability cover and the actual needs of South Africans, which indicates that the current life cover shortfall for the average South African earner is R700 000, while the disability cover shortfall is an overwhelming R1.1 million.
“Spending frivolously on wants while ignoring the need for life and disability insurance is really just masking a hole at the core of your finances. You do not want to discover that you and your family are not adequately provided for when it is too late,” warns Dempsey.
Equally, he states that part of building meaningful riches is saving towards an emergency fund that will assist you when the unexpected happens without having to fall back into debt, such as needing new tyres.
He also notes that paying yourself first for the future may mean denying yourself some pleasures now in order to save for meaningful goals such as a child’s education, a home or an independent retirement.
“You may be finding it difficult to save with rising prices putting a strain on your income, but one important trick is to save and invest first and then spend what is left. Make saving first a habit by automating your savings at the beginning of the month, so that you are not tempted into spending the entirety of your funds,” he suggests.
4. Invest wisely
A large bank account is not a true reflection of wealth, as rising costs and inflation means that you could lose the purchasing power of your hard-earned savings over time. Investing wisely for the long-term is therefore vitally important in order to grow the value of your money for the future, says Dempsey.
“This means investing your money with financially stable institutions and in regulated savings and investment products, rather than questionable pyramid or ponzi schemes offering unrealistic returns that will inevitably fall apart,” he emphasises.
He also points out that investments are ideally for the long-haul since the power of compounding (where interest on your investment also earns interest) means that smaller investments over longer periods of time may earn more than larger investments over shorter lengths of time.
“In times of market volatility, investors tend to panic and withdraw their investments. However, it is vital that you take a long-term view with your money, as withdrawing also means that you may lock in any losses and lose out on the benefits of market recoveries for your investments,” he explains.
5. Consult a financial adviser
A trusted financial adviser can help you to develop a unique long-term financial plan, complete with appropriate savings and investment products, that will help you to meet your financial goals and manage your wealth for your whole life even in times of economic difficulty, says Dempsey.
“Research show us that advised investors remain more disciplined about decisions to spend, save and invest, better financially protected and have more assets,” he says.
“Ultimately, consulting a financial advisor instead of gambling with get rich quick schemes is one of the most important financial steps you can take for the future, as your advisor will help you to build truly meaningful wealth in a sustainable manner.”