What better time to reconsider your financial position and determine what you aim to achieve in the coming new year?
The greatest arrow to add to your quiver is to develop a detailed financial plan for 2020. To be effective, it must of course be in line with your budget and be designed to accommodate the long-term goals you have set for your family and your retirement.
To help you create wealth in 2020, we have simplified the development of a financial plan, that will help you build a prosperous future, to six steps.
Step 1 – Know your worth
Prepare for 2020 by determining your true financial position. Add all your assets, like your house, other property and investments. Make a list of all your liabilities, your home loan, credit card balances and other debts. It is useful to add anticipated liabilities like significant home maintenance or purchasing a new vehicle, to plan for these from the start.
Then, review your budget and spending for 2019 to see where you have had unplanned expenses or in which areas you underspent.
Step 2 – Earn more
Next, spend some time on your income. It is unusual to create substantial wealth from only a salary. As a result, more and more people are working an additional job, on top of their full-time jobs. In addition to bringing in extra money, these additional jobs, or side hustles as they are known today, are often also passion projects that give you the freedom to express yourself creatively. The hobby which flourishes over weekends might even outshine your regular salary and grow into your main source of income.
This will require longer working hours. It could be overtime from your primary employer or could be generated by working for someone else. You might even start your own little enterprise on the side-line. This can provide you with that little house for retirement, or the nest egg you will need in your old age. In Hermanus there is actually a house named “Overtime”, because it had been paid with overtime money!
In addition, you could create passive sources of income where you receive regular income without having to spend much time on it and get other people to work for you.
This is the ideal opportunity to develop your skills as entrepreneur. Think up something original by identifying a gap in the market where you could provide a product or service that is not available, which could generate an income for you. Never stop looking for additional business opportunities which you could start on a part-time basis.
Step 3 – Spend less and stick to
With your 2019 budget as blueprint and list of expected liabilities and income from different sources, you can start developing a budget for 2020.
Consider your income and monthly expenses, like medical aid and retirement fund contributions; school fees; insurance premiums; staff salaries, transport costs; food, utilities; rent or bond repayments; and any other amount that is deducted from your account every month. Factor in any increases that may be applied during the year, to gain a twelve-month perspective on your finances instead of a month-to-month approach. This will help you to plan more effectively for those months when everything – from birthdays, to vehicle services and school tours – happen at the same time.
When considering the expenses column of your budget, bear in mind that looking for ways to save is great. However, be realistic and never skip the essentials such as life cover, income protection and dread disease or disability cover.
Very importantly, once you have prepared your budget, do your best to stick to it. Most importantly, however, is to follow the advice of not saving what is left after spending, but instead, spending what is left after saving.
Step 4 – Save and invest
Your regular salary will usually contribute a maximum of 30% to your wealth creation. The rest comes from your ability to spend less, so you have more to invest profitably for compound growth.
The secret is to save and invest, not to save and spend. Often people save for a specific purpose, like a luxury car, but that is simply deferred consumption.
Instead, take advantage of compound growth and leverage by saving and then investing your money. There are myriad options that will match your specific needs in terms of returns and risk profile. Stay informed of economic and political developments and take note of new investment opportunities in the market.
Try increasing your contributions to your pension or investment fund for the next three months and then for six months. Dream big but start your plan with small, but regular, steps which are economically feasible. You will smile one day when you reap the benefits. Also, consider how you can leverage some of the tax benefits available to all taxpayers that can reduce your tax liability and boost your returns.
Step 5 – Receive real returns
Make sure your investments earn good returns and be prepared to take risks that won’t put your capital at risk. You can easily be impoverished by being over-cautious!
All investments must have sufficient exposure to growth assets in order to beat inflation. For decades, equities have outperformed all other asset classes consistently but are considered higher risk than for example, fixed income instruments. An appropriate asset mix that will generate growth while maintaining a balanced overall risk profile is ideal.
Once you have the balance right, focus on what you can control. Today’s heightened political rhetoric and divisiveness have the potential to make investors nervous and negative.
The bigger picture is out of your control. Rather make sure you understand the underlying assets and sources of growth and risk to get value for your money. Buy the right growth and income assets because in that way you buy yourself rich and remember compound growth is a great wealth creator.
Step 6 – Stay on track
Monitor your investments regularly. Evaluate their progress and measure their performance. Make adjustments if any investment does not meet your expectations. Find solutions and better alternatives where your money will work better for you.
Take a futuristic view on what you want to achieve financially and constantly visualise your goals. This is what you want and are going to achieve financially. There is a beginning and an end in sight where you will be rewarded for your disciplined decisions.
There will be days where you have to deal with financial setbacks. However, just see it as a temporary delay on your path to success and learn from it. The setbacks as such are not your problem. It is how you respond to them, which determines your ultimate success.
Financial success comes to those who are proactive. Break the ice and start to create your own wealth in 2020 and beyond!