Personal Finance

There are three simple rules that must be followed in sequence -

• Earn more than you spend (or spend less than you earn). This should be a monthly habit, because anytime you don’t do this you disable yourself from doing the next two steps.
• Pay off all of your loans. As a general rule, by getting rid of your loans you are automatically reducing your expenses. This should be achieved before proceeding to the next step.
• Invest in items that increase your income. Ensure that your investments are actually profitable after both tax and inflation. This doesn’t mean that you can’t occasionally spoil yourself, if you have the money.

Retirement funding is usually done through investment instruments like pension funds, retirement annuities, endowment funds and provident funds.

It is the writers opinion that these (usually long term) investments have historically proven to be poor when tax and inflation are factored into their performance.

However, their benefit is to force financially ill-disciplined individuals to save for their retirement.

Both of these factors need consideration before entering into one of these contracts.

Generally these include the broad areas of savings accounts, unit trusts and investments on the stock exchange.

If interest earned on savings accounts is taxed, then savings accounts are poor performers in relation to inflation rate, as these two numbers are fairly directly linked.

Unit trusts are a reasonable vehicle for people with limited knowledge or time to invest directly on the stock exchange. If however you do have the time and knowledge to invest on the stock exchange, then have fun but be careful of trying to make a quick profit.

The loans that are addressed here are credit cards, car loans and home loans.

Credit cards are a great source of short term finance if you are disciplined enough to pay off the full amount owing every month. If you fail to pay off the full amount every month you are living beyond your means and have fallen victim of one of the most expensive loans available.

Car loans are expensive because they come with a requirement of expensive car insurance. As a general rule pay extra into your home loan as a means of financing the cash purchase of a vehicle.

Home loans are necessary and are not an evil. If you have a flexible home loan (sometimes known as an access bond) then a home loan is the best place to place any spare cash, because the interest saved is not taxable and your happiness in retirement is substantially increased by having a fully paid off house.

Insurance is a necessary way of protecting your wealth, but comes with the need to carefully read the contract.

Medical insurance comes in many forms. Please ensure your choice is appropriate for your stage in life and take full advantage of any loyalty programmes offered by your medical insurer as these tend to substantially reduce the cost of insurance.

Life insurance can be calculated as follows – All of your Loans plus one year of living expenses plus the cost of getting all of your children to their first degree qualification.

Short term insurance is required if you have borrowed money to buy an asset. If you have not borrowed money then shop around for various types of insurance and don’t let an insurance salesman sell you fear. Our experience is that insurance on immovable objects (like the contents of your home) should be looked at with a large dose of skepticism.

Don’t assume that you are going to live forever.

Make sure that your financial planning assumes you are firstly going to retire and secondly going to die.

Investigate forms of passive income to ensure a comfortable retirement (passive income is earned while sitting on a beach watching the sun set).

Never put off personal financial planning to the last minute, because those you leave behind will struggle to remember you fondly for leaving them destitute and hounded by creditors.

Don’t forget to plan one serious going away party.