By: John Kennedy, Director and Regional Head: Claremont, Citadel
At its essence, a financial plan is about giving purpose to your money: it works as a personalised roadmap to ensure that you target and reach your financial goals along your journey.
Crucially, living without a financial plan risks failing to “set sail” in building your wealth by allocating money to productive assets that offer long-term growth potential. In difficult times such as these, it’s too common to risk falling into the habit of focusing too much on the day-to-day and losing sight of the horizon. In other words, now is as good a time as ever to take a step back to gain some perspective, and then refocus or narrow down your plan to the near-term where you have influence over the ‘controllables’.
This means setting time aside and giving thought to the next year, to 2025, to 2030 and beyond. With this context and these goals in mind, you can then review your current ‘financials’, and begin with immediate steps to reach your short, medium and long-term aims.
Here are three simple questions to ask yourself and consider as you develop a comprehensive financial plan:
1. Begin with your near-term controllables – how much do you need?
Giving shape to your money begins with the near-term. Consider allocating enough capital to cash investments to cover your monthly expenses for a few months (if you’re still years away from retirement), or for a year or two if you’re nearing or already in retirement. This will ensure that your immediate needs and short-term requirements remain firmly secure, preventing you from tripping over any stones such as gaps in income, unexpected expenses, or wild market swings.
To calculate how much you will need, closely examine your monthly bank statements to see where you are spending, and how much you need on a monthly basis. For example, if your household expenses add up to R40,000, this means that you would need at least R480,000 from your portfolio and any other sources of income for a year. Rounding to R500,000 to account for inflation and any other short-term goals or expenses that you may have, this means that you would need to set aside at least R1 million to secure your income requirements for the next two years.
Medium-term savings can then be allocated to investments with slightly higher risk but also better growth potential than cash, such as bonds or even alternative asset classes such as hedge funds, protecting the purchasing power of your money against inflation.
Continuing the example above, this means that you might allocate an additional R2 million to this portion of your portfolio to provide a buffer for an additional three or four years which will allow you to ride out an economic or business cycle.
2. Carve out the next five or six years – what will this look like?
When setting your short- and medium-term goals, consider your life stage or timeline, and consider any potential changes in circumstances. What you would like to achieve and where you will be directing your energies over the next five or six years?
For instance, you may be looking to upscale your home, or perhaps downsizing or moving to a retirement village. You may wish to complete an educational course, or plan for children’s education. You may want to transition your career, travel more, or your children may be moving out the house. You may wish to make provision for grandchildren, or for increased medical commitments as you grow older.
Once you have completed this list, put a quantifiable amount or number next to each item in terms of how much you may save or spend, and consider how these may impact your planning.
3. Look to the horizon – are you preparing for the future?
It’s difficult to look towards the future when you’re feeling anxious and vulnerable – but remember that you don’t need all your money tomorrow or even in the next five years. After all, you can’t make long-term investment decisions simply based on how you are feeling today. So, once your current or short-term needs are met, look to the horizon, give yourself the space to think broadly and dream, and ensure that you are steering (and saving) in the right direction.
In fact, having clear long-term goals in place is often key to maintaining the right mindset in the face of market downturns, and avoiding any harmful knee-jerk decisions. If your portfolio is correctly aligned with the timelines for your various goals, your long-term savings should be invested in productive assets, such as equities, in order to build your wealth. And, matched with aligned time horizons, you should allow these assets enough time to ride out any storms or short-term volatility, removing the need to react quickly when financial markets experience wild swings.
Ultimately, there’s no simple answer to the question of what to do with your money or how best to define the utility of your money. But without sitting down to reflect on your direction, and consulting with a professional financial adviser on how to best meet your various goals, the risk is not only that you may fall prey to the unexpected, but also that you may miss out on giving true shape and purpose to your money.