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Planning is the key to wealth - Quarter 4, September 2012
Research shows that there is enormous benefit in planning how you save and spend your money. A report by UBS Wealth Management in Switzerland shows that if you do not have budgets, investment plans and retirement plans, you are guaranteed to limit your wealth over your lifetime. Conversely, even a small amount of planning will make a massive difference to the wealth that you can accumulate over your lifetime.
A simple budget makes an enormous differences
I am sure many people get to the end of the month (usually during the week before payday) wondering where their money went. If they have this experience on a regular basis over their working life, they usually get to retirement age wondering why they have no savings. If you find yourself in this position on a monthly basis, it is almost certain that you don't have a budget. A good budget should be very simple and more importantly, very realistic. Many people start budgeting by deciding what they SHOULD spend, rather than what they currently spend. For example, if you currently spend R5,000 per month on food, restaurants and entertainment, there is little point in budgeting an amount of R2,000 from next month. Rather start by reducing these budgeted costs by R500.00 per month and see if you can stick to it. You can progressively decrease your costs over time to a level that is realistic and does not reduce you to the life of a recluse.
This principle should apply to all your variable expenses as some expenses like your rent or mortgage are not variable. In addition, you should start budgeting to save some money every month. You cannot rely on your company pension to cover all your needs. It will not be enough to live on when you retire so you will need additional savings. You should try to save 15% of your gross salary every month. If you earn R10,000 per month before deductions then you need to save R1,500 per month. If this is too much, then try to start slowly and progressively increase your savings as your salary (hopefully) increases.
You need to plan your savings too
The graphic below shows the difference in wealth between people who make no plans for the way they spend and save (on the left) and those who are very good planners (on the right). What is clear is that those who don't plan, place a limit on the wealth they can generate over their lifetime. This is shown by the blue line which shows the top amount of wealth of each type of person. The wealthiest "non-planners" have a maximum wealth of $350,000 whilst wealthiest "simple planners" have a maximum wealth of $625,000. Even the average "simple planners" are almost as wealthy as the wealthiest "non-planners". This might seem complicated but the graphic is showing us that if you do a little bit of planning around your finances, you have a tiny chance of being destitute. If you do not do any planning; you have a reasonable chance of being poor and you have almost no chance of being wealthy.
Plans don't need to be complicated
If you start with a simple budget and stick to it, you will eventually get to the point where you are building up savings because you have eliminated your debt. At this stage you can start planning your investments. Your plan can be very simple, for example you could decide that you are going to build up an emergency cash fund for the first 6 months. Thereafter you can start building up an investment portfolio. An investment portfolio could be as simple as a monthly investment into an exchange traded fund (ETF), shares or unit trusts. If you have the inclination, you can start researching investments in more detail and create your own portfolio of shares and ETF's. If you don't want to manage investments contact a professional advisor.
In summary, the research tells you that you need to take control of your money, don't let it control you. With a small amount of forethought, you could be enabling yourself to increase your prospects for wealth substantially over your lifetime.
Warren Ingram, CFP®, has been advising people about their money since 1996 and is a director of Galileo Capital, www.galileocapital.co.za.
Do you have any personal finance questions you would like to ask Warren? Email him at Warren@galileocapital.co.za