Pocket Guide To Money
The beginning of the year is a good time to do a spring clean on your personal finance. It gives you the opportunity to press that reset button, to start again, if you have been on the wrong track. I would like to share with you my Pocket Guide to Money, which is what I have learnt, accumulated and have been practising over the years. It contains eleven steps, forming a virtuous cycle.
If you take time to understand these eleven steps, make your own notes and put it to practice, continue to work at it, you will attain your financial independence and freedom. While it is most beneficial to start this process as young as possible (and I encourage you to share these concepts with your teenage children if you have any), it is never too late to start improving on your personal finance.
I will go through each step briefly. In the coming months, I will focus on one step at a time, elaborating on the step, providing context, lessons and tools to empower you.
Step 1 - Make as much money as you can
For most people, most of our money or wealth comes from our ability to work, to earn an income. Most of us were not born into a rich family. Many in South Africa were born into abject poverty. We had to learn, acquire skills, find a job or start a business, to provide for ourselves and our family.
It is therefore important to improve your education, knowledge and skills, to network with the right people, to enhance your employability, or be equipped to have your own business.
The more money you can make, the more financial resources you have, the easier it would be to attain financial freedom.
Step 2 - Do not spend more than you earn
The adage "live within your means" comes to mind here. To “live within your means” simply means to spend less on your lifestyle than you generate in earnings. Your “means” is your income. To live within that threshold, spend less than you earn.
This requires self-control. A person does physical exercise to improve his muscular physique. A person does quizzes to improve his mental sharpness. Similarly, one has to exercise his financial muscle, live frugally and save money. Resist the marketing and advertising bombardment, of tempting you to buy now and pay later.
Rather save for the thing(s) you need or want. When you buy that thing you want with the money you have saved up, it gives you a sense of achievement and satisfaction.
Step 3 - Do not take on credit
South Africa is a westernised economy, its financial system is modelled on the European and American credit system. If you have a steady income and a good credit score, it is easy for you to get credit.
Credit is generally defined as a contractual agreement in which a borrower receives something of value now and agrees to repay the lender at a later date—generally with interest.
But don't take on credit, it means you get into debt. Apart from financing high-value items such as a property, a car, business or study loans, you should not take on credit.
Step 4 - Keep record of your spend
The foundation of good personal finance is budgeting. Expense tracking is the twin brother of budgeting.Budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. Budgeting is simply balancing your expenses with your income.
Track your daily expenses for a minimum period of three months. At the end of each month, sit down and analyse where your money has gone, so you can identify ways of cutting expenses. You will be surprised to find you have been paying every month for something you have not used.
Step 5 - Invest 15% of your earnings
Robert Kiyosaki, a leading personal finance and business coach of our time, advocates "Pay yourself first".People who choose to pay themselves first allocate money to the asset column of their balance sheet before they’ve paid their monthly expenses. Essentially, you set aside a specific amount of money right off the bat, and then live off what’s leftover. And that’s how wealth grows.
In South Africa, this means putting 15% of your monthly pay into a retirement annuity, a tax-free investment, an offshore investment, or getting a business education or subscription.
Step 6 - Set up an emergency fund
You should prepare for a rainy day. Things can happen and will happen. A death in the family, sickness, accident, a punctured tyre, someone in the family comes to borrow money, the phone is stolen ... unforeseen expenses, the list goes on.
Or you lose your job. Or your business is negatively impacted by COVID.
Having an emergency fund can help deal with these instances, cushion the blow. You should use a bank savings account, separate from your daily transactional account, to set up an emergency. You should have a minimum of 6 months' pay in that emergency fund, to be safe.
Step 7 - Money is a means to an end
Money itself has no meaning. Wealth has no meaning if it is not used for the good of people.
People have the natural desire to grow, to help, to have a good life, to look after our family, to help our friends, to be happy. Money should be used to enable, to realise all these good things.
Once we understand that money is just a medium of transaction, that money is a means to an end (objective), then we will not accumulate money for the sake of it.
Step 8 - Set up short-term goals
I define short-term goals as something you would like to achieve in the next two years. Typical examples are: Getting married, finish my study, start a family, buy a house, buy a car, renovate my house, pay for my children's education, pay off my debt.
Write them down, stick on your wall so they are visible. Work out your monthly plan to attain these goals.
Step 9 - Set up long-term goals
I define long-term goals as something you would like to achieve in the long term, generally in more than 10 years' time, but can also be anything in more than two years. Typical example are: All my children complete their tertiary education; financial freedom by age 55; debt free; living in a retirement home on the coast; overseas holiday; R1bn business.
Step 10 - Focus on building assets
The accounting definition of an asset is this: Things that are resources owned by a company and which have future economic value that can be measured and can be expressed in Rands. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment, and vehicles.
I prefer Robert Kiyosaki's definition of an asset: An asset is something that puts money in your pocket. Examples are buy-to-let property, cash-generating businesses, shares, unit trusts, investments that pay you interest, gold, silver.
You should spend your lifetime accumulating assets that put money in your pocket.
Step 11 - Regularly review your progress
Review your actual progress against your budget, short-term goals and long-term goals, to check whether you are on track. In terms of your monthly budget, you should check monthly. In terms of your short-term and long-term goals, you should review your progress at least annually. Typically the good time to review would be the end of a calendar year, the beginning of a year, or the middle of a year (June/July). They tend to coincide with the school holidays.
Exercise to do:
Jot down what you have learnt in your diary, notebook or cellphone.
Think about what each step means to you and write it down.
What are the 3 things you are going to implement now (not tomorrow)Plan for the next 12 months, when you will be doing the relevant activities, mark them in your diary to remind you.
If you take time to understand these eleven steps, make your own notes and put it to practice, continue to work at it, you will attain your financial independence and freedom. While it is most beneficial to start this process as young as possible (and I encourage you to share these concepts with your teenage children if you have any), it is never too late to start improving on your personal finance.
I will go through each step briefly. In the coming months, I will focus on one step at a time, elaborating on the step, providing context, lessons and tools to empower you.
Step 1 - Make as much money as you can
For most people, most of our money or wealth comes from our ability to work, to earn an income. Most of us were not born into a rich family. Many in South Africa were born into abject poverty. We had to learn, acquire skills, find a job or start a business, to provide for ourselves and our family.
It is therefore important to improve your education, knowledge and skills, to network with the right people, to enhance your employability, or be equipped to have your own business.
The more money you can make, the more financial resources you have, the easier it would be to attain financial freedom.
Step 2 - Do not spend more than you earn
The adage "live within your means" comes to mind here. To “live within your means” simply means to spend less on your lifestyle than you generate in earnings. Your “means” is your income. To live within that threshold, spend less than you earn.
This requires self-control. A person does physical exercise to improve his muscular physique. A person does quizzes to improve his mental sharpness. Similarly, one has to exercise his financial muscle, live frugally and save money. Resist the marketing and advertising bombardment, of tempting you to buy now and pay later.
Rather save for the thing(s) you need or want. When you buy that thing you want with the money you have saved up, it gives you a sense of achievement and satisfaction.
Step 3 - Do not take on credit
South Africa is a westernised economy, its financial system is modelled on the European and American credit system. If you have a steady income and a good credit score, it is easy for you to get credit.
Credit is generally defined as a contractual agreement in which a borrower receives something of value now and agrees to repay the lender at a later date—generally with interest.
But don't take on credit, it means you get into debt. Apart from financing high-value items such as a property, a car, business or study loans, you should not take on credit.
Step 4 - Keep record of your spend
The foundation of good personal finance is budgeting. Expense tracking is the twin brother of budgeting.Budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. Budgeting is simply balancing your expenses with your income.
Track your daily expenses for a minimum period of three months. At the end of each month, sit down and analyse where your money has gone, so you can identify ways of cutting expenses. You will be surprised to find you have been paying every month for something you have not used.
Step 5 - Invest 15% of your earnings
Robert Kiyosaki, a leading personal finance and business coach of our time, advocates "Pay yourself first".People who choose to pay themselves first allocate money to the asset column of their balance sheet before they’ve paid their monthly expenses. Essentially, you set aside a specific amount of money right off the bat, and then live off what’s leftover. And that’s how wealth grows.
In South Africa, this means putting 15% of your monthly pay into a retirement annuity, a tax-free investment, an offshore investment, or getting a business education or subscription.
Step 6 - Set up an emergency fund
You should prepare for a rainy day. Things can happen and will happen. A death in the family, sickness, accident, a punctured tyre, someone in the family comes to borrow money, the phone is stolen ... unforeseen expenses, the list goes on.
Or you lose your job. Or your business is negatively impacted by COVID.
Having an emergency fund can help deal with these instances, cushion the blow. You should use a bank savings account, separate from your daily transactional account, to set up an emergency. You should have a minimum of 6 months' pay in that emergency fund, to be safe.
Step 7 - Money is a means to an end
Money itself has no meaning. Wealth has no meaning if it is not used for the good of people.
People have the natural desire to grow, to help, to have a good life, to look after our family, to help our friends, to be happy. Money should be used to enable, to realise all these good things.
Once we understand that money is just a medium of transaction, that money is a means to an end (objective), then we will not accumulate money for the sake of it.
Step 8 - Set up short-term goals
I define short-term goals as something you would like to achieve in the next two years. Typical examples are: Getting married, finish my study, start a family, buy a house, buy a car, renovate my house, pay for my children's education, pay off my debt.
Write them down, stick on your wall so they are visible. Work out your monthly plan to attain these goals.
Step 9 - Set up long-term goals
I define long-term goals as something you would like to achieve in the long term, generally in more than 10 years' time, but can also be anything in more than two years. Typical example are: All my children complete their tertiary education; financial freedom by age 55; debt free; living in a retirement home on the coast; overseas holiday; R1bn business.
Step 10 - Focus on building assets
The accounting definition of an asset is this: Things that are resources owned by a company and which have future economic value that can be measured and can be expressed in Rands. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment, and vehicles.
I prefer Robert Kiyosaki's definition of an asset: An asset is something that puts money in your pocket. Examples are buy-to-let property, cash-generating businesses, shares, unit trusts, investments that pay you interest, gold, silver.
You should spend your lifetime accumulating assets that put money in your pocket.
Step 11 - Regularly review your progress
Review your actual progress against your budget, short-term goals and long-term goals, to check whether you are on track. In terms of your monthly budget, you should check monthly. In terms of your short-term and long-term goals, you should review your progress at least annually. Typically the good time to review would be the end of a calendar year, the beginning of a year, or the middle of a year (June/July). They tend to coincide with the school holidays.
Exercise to do:
Jot down what you have learnt in your diary, notebook or cellphone.
Think about what each step means to you and write it down.
What are the 3 things you are going to implement now (not tomorrow)Plan for the next 12 months, when you will be doing the relevant activities, mark them in your diary to remind you.
