I recently got home from work to find my eldest daughter in tears. She had a massive university assignment due and feared that she wouldn’t be able to finish in time.
We’ve probably all been there before. Whether it’s an assignment, a large sports event, or preparing for your retirement, we all know the anxiety that comes with facing a tight deadline.
My advice to my daughter was to divide the assignment into smaller sections and to finish each section before moving onto the next, as opposed to focusing on the assignment in its entirety.
The same principle applies to our personal wealth. The financial aspect of our lives in their entirety can be so vast and overwhelming that it’s easy to understand why it causes anxiety and distress.
The task of managing one’s personal wealth can be broken down into many little pieces, but I’d like to focus on five smaller wealth challenges that can help combat the anxiety that accompanies financial planning:
1. Invest in a retirement annuity
If your employer does not offer retirement benefits, you seriously have to consider investing in a retirement annuity (RA). It’s a disciplined savings method.
In addition, the allowable tax-deductible percentage (personal income tax) of the greater of your taxable income or remuneration currently amounts to 27.5%, with an annual maximum of R350 000. That means you can enjoy up to 27.5% of your income as an allowable tax deduction, just by making use of an RA.
2. What about your emergency fund?
“Life happens”, right?
We’ve all experienced events that were completely out of our control, and that ended up costing us money we didn’t have at the time. We take out short-term insurance to cover us against losses or damage to personal items. We take out medical cover against unforeseen medical expenses. But do you have an emergency fund to cover you against unforeseen expenses, such as your car breaking down outside of its warranty?
Most experts recommend having at least three to six months’ worth of personal expenses set aside in an emergency fund. This would normally be invested in something like a savings account, or money market account, where market volatility isn’t an issue, and where you can gain access to your funds within 48 to 72 hours.
3. Invest in yourself
James Clear, author of the bestseller, Atomic Habits, summarised four types of wealth perfectly:
- Financial wealth (money)
- Social wealth (status)
- Time wealth (freedom)
- Physical wealth (health)
Building towards your personal wealth doesn’t just mean you have to pay someone to help you achieve your financial goals. At least three of these four types of wealth require you to invest in yourself.
4. Are your ‘containers’ full enough?
You should, in fact, have three “containers”, or wealth strategies, and these containers are not equal in size. The first container is your income strategy container. It should contain your income and capital requirements for the next three years. These funds are normally allocated between cash and income funds.
Your second container is your wealth preservation strategy container and should contain your income and capital requirements from years four to six from now. These funds usually have an equity allocation of 30% to 40% with a goal of achieving returns in excess of inflation plus 3% over a rolling three-year period.
The third container, your wealth creation strategy container, should contain the balance of your capital not required for income and capital requirements from years one to six. It’s normally allocated to long-term investments in balanced- and equity funds. These funds should aim to deliver returns of inflation plus 4% to 7% over a term of longer than six years.
5. Diversify your risk
Whether you’re an experienced investor or just starting out, always ensure that your risk is well diversified. We live in an era where we can invest in a variety of asset classes, through various service providers and in multiple countries at the press of a button. Why would you choose increased risk by focusing on only one area?
I find that some experts are recommending to clients that, based on the past few years’ tough economic environment, they should now withdraw all funds from their local investments and invest those funds in the “better-performing” US. These very people also seem to forget that from May 1999 to May 2009 the US didn’t show any growth in rand-terms. In fact, it delivered negative performance over that period.
SA has one of the lowest correlations with the US, which means that you cannot always draw a parallel between their economic performances. If you had invested 50% of your capital in SA and 50% of your capital in the US 20 years ago, SA would have been responsible for your portfolio’s performance in the first 10 years while the US suffered, and the US would have been responsible for good performance over the last 10 years while SA suffered. Investing in both countries, therefore, as opposed to only one of them, clearly seems to be the healthier option.
Many more aspects can be added to any healthy financial plan. But start with these five and take them one at a time. If you still feel overwhelmed, you can always ask a financial planner to assist you.
Schalk Louw is a portfolio manager at PSG Wealth.