By Richus Nel, Certified Financial Planner
You need the skills of a marksman to achieve financial independence or manage personal finances successfully.
Sharp shooting is an art, clinically executed and the marksman is punished for the smallest mistakes. Especially if one compares the “shooting results” from a professional marksman vs. those of an average person. Once the trigger is pulled on personal finance decisions, as with shooting, the results are mostly irreversible – similar to those of the bullet flying from the marksman’s rifle.
The majority financial planning relationships between a financial planner and a client typically starts about 10-15 years into the person’s working career, sometimes later. This is problematic to the well accepted “general guideline” within financial planning [saving a minimum 15% of your gross income for 40 years, to provide you with a retirement income equal to 75% of your final salary (increasing annually by inflation), referring to a “replacement ratio” of 75%]. This means that in the majority of instances that the “40 years retirement provision” only starts at the age of 35, 40 or 45 (and some instances only in their 50’s). It is exactly at this age when individuals are most challenged financially (perhaps with a bond, children, single income, medical for the whole family, long-term risk provisions) and inflation demands reflected in price increases, just to “keep the lights on”.
Metaphorically “sharp shooting” can help you to prepare and reshape “a late retirement provision” scenario.
1. Settle down
Setup a monthly routine to plan and review your finances. During this time you can budget and plan ahead. Depending on how desperate you are in turning your financial situation around, here you would have the opportunity to spend time thinking about your current job, extra income and other constructive financial thinking.
One benefit (probably the only one of starting late with financial planning), is that by now (individuals in their late 30’s or 40’s) probably have a good idea of the living standard they would like to pursue in life. This at least make any projection more accurate.
Hopefully the individual has made financial progress on the property ladder and bought a reliable car that they are willing to, and can drive for 5-10 years. In many instances none of the latter has taken place, so individuals “starting from scratch” need radical turn around.
2. Taking aim at the target
Draw up a budget from the last 3-6 months of expenditure and track where your money is going. Once your spending patterns are determined, start with a “blank canvas” and reclassify your expenses in the following order:
a). Absolute necessities. This involves all “physiological” and “safety” expenses including medical, life and disability risk cover. Retirement planning can also fit in here, as this is a necessity in some shape or form. Others can feel they can reach self-actualisation without retiring one day, but be realistic, as you cannot work forever.
b). Modern day demands to earn a living. This includes spending on issues like transport (whatever node e.g. car / UBER / taxi / train / bicycle), communication (mobile or other), education, socialising and clothes. Holidays also fit in here, just decide on the appropriate format.
c). Nice to haves. The fun expenses like cappuccinos, more appliances, lifestyle expenses like decorative items.
Once the items have been categorised, start reviewing each item in each category and identify at least two to three alternatives in different price ranges. Items should not be considered on price only but on the value they contribute to your life.
3. Pull the trigger
Once the budget is finalised, implement and start tracking spending behaviour monthly / weekly / daily; whatever works best for you. Remember that there is no perfect way, as long as the bullet hits the target where intended, nothing needs changing.
4. Reflection – review the target and improving your shooting
As with all things at first, it will be a “hit and miss” or “trial and error” result. Gary Player has taught us “the more you practice, the luckier your get”. As you continue to practice, the results will start improving. It is advisable to include a “trained coach”, helping you refine your shooting.
Remember as you are starting late:
- Don’t make any more unnecessary mistakes, as the time for recovery is getting shorter. Make sure you are properly insured against further financial setback (health, accident, etc.) which could ruin your gained ground
- Fight impulsiveness – don’t pull the trigger if you hesitate, first get more information
- Learn from historic mistakes, like credit, for instance.
5. Get a coach
Make sure you are doing your homework before getting a financial advisor coach. Best is to find someone with a formal education background and the industry standard qualifications for providing financial advice – Certified Financial Planner, with experience:
- Seek independence to instil trust in your advisor’s guidance.
- Co-manage emotions – this will be a lot easier with a financial planner.
- Preserve investment capital (retirement -or general savings) – Do not gamble with investment decisions and do not use saved capital, to finance living costs under any circumstances.
- Save often by putting away surpluses – wage increases, bonuses, inheritances, capital gains from property sales.
- Upskill yourself so you can partner with your financial advisor on financial decisions – regularly read financial articles and listen to high quality financial radio or television programmes.