Everyone would like to own their own dream ocean view home one day but how many people can actually achieve that ambition? More than one would think, according to Hedley Lamarque, CFP®, financial planner for BDO Wealth Advisers.
“There are many misconceptions about what can be achieved by the average person in his or her lifetime but it is surprising how many dreams can be realised with sound financial planning,” he said.
“It is important to dispel the myth that professional financial planning is just about recommending financial products. Experienced financial planners are equipped to guide you to make good decisions so as to manage your finances successfully to achieve your life goals, such as being able to support loved ones financially, being debt-free, retiring in the lifestyle that you want and, of course, buying that dream ocean view home.”
Lamarque offers some tried and tested tips on how individuals can organise their finances so that they determine their financial future and attain the luxuries they aspire to.
“Any long term gains are going to require saving – no pain, no gain – but the trick is to find a balance between enjoying a good lifestyle whilst continuously investing for the future – and that enticing ocean view home,” Lamarque said.
His golden rule is you’re never too young to start investing.
“If you start investing a percentage of your earnings on a monthly basis from an early age and continue to do so through to your 50s or 60s, you will more than likely never have to worry about having enough capital for your retirement years or to buy your dream home. If you delay starting your investment programme by even five years you will find it hard to catch up the lost growth.”
“Don’t fall into the trap of believing that it will get easier to save later in life when your income increases. Start now. As your income increases, so do the claims against it and, as your lifestyle improves, it becomes more difficult to start the discipline of saving the longer you postpone it.”
His advice is to start investing from your very first pay cheque, saving 10% of your earnings every month, increasing this as your salary grows. Obviously this would need to take a person’s personal circumstances into account.
“Always pay yourself first which means having the investment or saving deducted on the same day as your salary is paid into your account so you are not tempted to spend it,” he said.
“Start out by saving for an emergency cash fund – enough to cover 3 months of expenses – in a separate account so you are not temped to splurge in a weak moment. A money market account will probably offer the best combination of a good interest rate and flexibility.”
“Always compare the options at different banks to maximise your returns and reinvest any interest to earn growth-on-growth or compound growth. Remember though that investing money in a bank account for a long time is a more risky investment than investing in property or shares because your chances of beating inflation, on an after-tax basis, are far lower. Cash is only a good investment where there is little or no inflation.”
Once the emergency fund is in place, it is time to move on to medium term investing, Lamarque said.
“Equities on the JSE are a growth asset which can have good returns and you can minimise most market volatility over a ten-year period but your capital is not guaranteed. This is also the case for two other good options – a sound unit trust with a moderate equity outlook or a property unit trust, both of which should provide growth and a relatively good medium term return.”
Lamarque said that equities and offshore investments performed the best historically but were also typically the most volatile over short periods.
“You need exposure to risk to outperform inflation and the market but it is important to have your eggs in more than one basket to spread your risk. Investing in a combination of equities, property, cash and bonds will give you a stable return over the medium term and the probability of capital losses reduces drastically over the short term,” he said.
Chasing the highest possible investment return was often a ‘wealth hazard’, he warned, and switching between different investments often resulted in lower returns.
“A long-term investment return of 5% above inflation is considered a very good investment return,” he said.
Lamarque stressed that the sooner one started investing, the higher the chances were of accumulating a significant amount of capital which could result in the purchase of one’s dream home.“You need to make the power of compound interest work for you with very long investment periods providing the most benefit,” he said.
Lamarque said that it made sense to take advantage of all tax deductions legally available in full to attain maximum benefit and for investments to grow.
“It is not illegal or socially immoral to claim back as much as you are legally allowed from SARS,” he said. “If you are at the maximum tax rate and utilise all the retirement tax deductions available from SARS, you will in effect be contributing up to an additional 41% to your retirement savings.”
There were other tax deductions such as donations to public benefit organisations, home study expenses and travel allowances from one’s employer for business travel.
“Also, don’t overlook the annual Capital Gains Tax (CGT) exclusion of R40 000 per annum. Keep a check on the growth of investments to utilise the CGT annual exclusion once your gains start exceeding this amount.”
Using borrowed money wisely and for the right purpose could be a smart move to create wealth, Lamarque said.
“Don’t assume that you have to pay off all your debt as quickly as possible before you invest. Debt creates wealth if you’re buying something that increases in value over time and that produces some form of income while you own it, such as a business or a rental property.”
Buying your own home to get a foothold in the property market is a good idea when you are able to, as a first step towards buying that dream home, Lamarque said.
“The best way to finance this is through a mortgage bond which will typically be paid off over 20 years or more. However the quicker a person can pay this off the better, as the longer the term of the loan the more the interest accumulates – this is where compounding starts working against you.”
Another rule of thumb was never to cash in retirement savings when changing jobs, Lamarque advised.
“You could live to be 100 years or more and you will probably be retired for 30 or more years. If you want to be spending that time in your dream home or making ends meet, it is essential to preserve your retirement benefit,” he said.
To achieve the best wealth-building results, Lamarque recommended consulting a reputable wealth manager with the right profile and credentials.
“Certified Financial Planner® professionals have the necessary education, experience and expertise to construct holistic, tailor-made financial plans comprising financial products and investment portfolios based on an individual’s personal circumstances and his or her specific goals and objectives,” he said.
“According to a study undertaken by the Financial Planning Institute, those working with a CFP® professional are more successful in sticking to their financial strategies and are more knowledgeable about financial matters than those who go it alone.”
“You can’t take chances when planning and implementing your personal financial strategy because it is your lifestyle – now and into the future – that is at stake,” he said.