Photograph by: Bongani Mnguni © Sowetan
CREATING financial security is hard work and requires a radical shift in mindset
If we were as logical and efficient as we thought we were about making and managing money, we'd all be a lot richer.
That so many of us count down those final hours to payday is proof we're not as good at it as we'd like. There are ways to create greater financial security, but it usually involves hard work and often a radical shift in mindset.
Money myths abound, many perpetuated by a lack of knowledge or understanding, and to make inroads into the kind of financial life we'd like, these myths need to be exploded. Here are 10 of the most important ones.
I don't need someone to help me work out my finances
Can you honestly say you have enough financial knowledge and insight to make the best possible choices for your money? If you are serious about your financial security, it's in your interest to speak to someone who really knows what they are doing. A financial adviser can help you make choices to achieve what you are unlikely to manage alone. If you get advice, make sure it's unbiased.
Saving money is vital
While this is true, it's also an incomplete notion. Not spending money frivolously is vital, but saving alone is not going to create meaningful wealth. You need to make it multiply. The one thing you can be sure of when you put money under your mattress or even in the bank is that it won't beat inflation and, over time, its value will be eroded. Your saved money needs to be put into an investment where it can work and grow. If you aren't confident enough to choose your own investments, get advice on what investment products are most suitable for you.
Budgeting saves money
It's a good start, but it's the easy part. All you need to do is note down the money coming in, subtract everything you spend, and put aside the rest for saving and investment. Gavin Came, chairman of the Financial Planning Committee for the Financial Intermediaries Association of Southern Africa (FIA), says while recording your pluses and minuses is an important first step in taking control of your finances, it is not a solution. You need to use it as a springboard to create a structured savings and investment plan.
I don't have enough money to start investing
Just because you haven't paid off your house and car doesn't mean you shouldn't put money into investments. Henry van Deventer, head of financial planning at Acsis Limited, says few people are completely debt-free, especially those between 20 and 50 who need to be growing their wealth. Successful investing is about creating the right habits early on, and paying yourself at the beginning of the month. There are investment options available - such as ETFs - that require as little as R250 a month to be invested. Over enough time and assuming you have made a good selection, compounding will turn this into a considerable sum. However, Came says people with little spare cash and who are uncertain about their investment options would do well to consider contractual savings such as endowments and retirement annuities.
The stock market is tanking, so I should sell my investments and get out before things get worse
The flight instinct gets ratcheted right up when the markets take a beating, and it's just about then that Warren Buffett and other seasoned investors start reaching for their wallets. While the stock market can be volatile and your capital might surge and plummet, it is one of the only places where, over time, your money can grow faster than inflation. If they weren't invested in companies that actually collapsed, like Lehman Brothers, most people who kept their money in diversified products during the economic meltdown between 2007 and 2009 have made inflation-beating returns. When the stock market goes down, you need to ride out the dip and wait to sell until you will realise a profit.
Renting is like throwing away money
Owning your own home is a dream many of us have, but renting can be beneficial, depending on who you are and what you do. A young person with no dependants and a job that involves travelling might be encumbered by a house and the responsibilities that come with it. And it's worth considering that if you buy a home with a home loan, you're going to be "throwing away" money for the first few years as you pay off your interest on the loan. You might find you are paying more than you would on rent, at least initially. And then there are rates and taxes, levies and repairs, which wouldn't be for your account if you were renting.
Owning your home is always a good investment
All investments have an element of risk. While property is generally fairly low risk, there are instances in which it loses value and you lose money. Good suburbs can become unpopular, you could get terrible neighbours or a squatter camp springs up a kilometre away. Even if the value of your home does soar, you'd have to sell it and downsize to realise the value. Buying a property to rent out is another investment possibility. But Van Deventer suggests you calculate the total cost of the property, including the interest on your home loan and associated costs like levies, insurance and maintenance. And there will be times between tenants when you get no rental but still have to pay the bond. That said, rent values increase each year, while bond repayments tend to stay relatively flat, and, after a few years, you might find your rental covers your bond and more.
You get what you pay for
Because something is more expensive doesn't make it better quality. One example is generic drugs, which are considered to be just as effective as the original patented brand. A R100 bottle of wine might taste different to a R50 bottle, but whether it's better or not is entirely subjective. Before you buy something because you are in the habit of buying it, consider what really gives it value. If you have a headache, the generic drug will most likely do the trick. If you don't have to impress your guests with Cristal champagne, you'll probably enjoy Kaapse Vonkel just as much . But obviously there are times when greater cost relates to better value. You might be able to get your hands on a flat in Hillbrow for R30000, but it's almost certainly going to be a worse investment that a R1-million townhouse in Bryanston.
I'm too young to worry about saving for retirement
The younger you are, the more years of compound interest you have ahead of you. Investopedia.com calls compound interest free money, and Einstein called it "the eighth wonder of the world", adding, "He who understands it, earns it; he who doesn't, pays it." If you're young, don't think about saving for your retirement - get out there and start doing it.
I'm too old to start saving for retirement
The best time to start saving for your retirement is when you're 20. The second-best time is right now. Your money won't have the time to get the full benefit of compound interest, but if you end up with R3-million instead of R9-million, it's still better than R1-million. Even if you're nearing retirement, you won't need your entire nest egg the day you turn 65, and there are ways to make it keep on growing until you really need it. Speak to a financial adviser for the best ways to play retirement catch-up.
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