Danie Venter, Advisory Partner, Citadel
Whenever there is an opportunity to splurge – be it the festive season, the start of the school year or Easter – retailers bombard consumers with specials and shoppers scramble to fill their trolleys to the brim with discounted spoils. This leaves experts asking the ubiquitous question: “How do those caught up in the craze, make it until the next pay cheque?” While those ensnared in a spending spree say: “I’ve tried listening to the experts, yet I still see no changes in my finances.”
Advice from financial experts abounds when it comes to increasing personal fortunes. One of my favourites is Robert Kiyosaki, author of the world renowned wealth creation book “Rich Dad, Poor Dad”, who compared the habits of families who live from pay cheque to pay cheque with those who don’t rely on their salaries as their sole source of income. A valuable lesson I took from his book is “pay yourself first”. Although this book was a best-seller for many years, not many people followed his advice and now, unfortunately, still find themselves anxiously waiting for their next pay cheque.
Another financial commentator I enjoy is blogger Money Moustache. Although he personally advocates an extremely frugal living approach, in his posts he plays two characters off against one another. The first is an extremist who favours frugal living and the second a realist who makes these ideas more accessible to the regular consumer. Both are sound approaches to one’s finances: what it boils down to, though, is execution.
When it comes to personal finances, I like to refer to the “consumption of availability” (COA) which comes from observing the lives of my clients, friends and family. If a person has a positive bank balance (i.e. availability), that person will consume for as long as they have money in the bank. Once the cash is gone, the person invariably moans that they don’t earn enough.
So, understanding this behavioural pattern, how can we make COA work in your favour? Is there a magical pill that we can take to cure an ailing bank balance or an app that will change spending habits? In some instances pills and apps work, but my advice is simple: take responsibility for your spending.
Start by reviewing your bank statements (at least the last three months are recommended) and categorise each transaction. A programme like Excel is an excellent tool. This exercise will allow you not only to understand debits and credits, but will also help you to see where you are actually spending your money.
Review your debit orders: explore transferring these to the first of each month which will allow you to determine what is available for the rest of month. If you are insured, shop around for cheaper insurance. Maybe look at consolidating your debt (mortgages, cars and loans) – it is often cheaper to pay one debtor as opposed to many.
Only once you have a complete understanding of your spending habits can you make changes to them.
Now that you understand your spending habits, it is time to determine your essential weekly cash requirements. I recommend you open a separate secondary transactional account which is automatically credited weekly with a sum that meets these needs. Once you have done this, play a game with yourself by trying to reduce your weekly outlay. This will ultimately help you establish new spending habits. As time goes by, you will see the balance in your primary account grow.
Imagine you are able to use this spare money to save R1,000 per month, and assume your assets achieve a return of 10% per annum; what is the possible effect on your pocket over time? The results, especially in a compound interest bearing account, will see you well rewarded. If you put R1,000 per month under your mattress, after 10 years you will have accumulated R240,000, if you are earning a compounded 10% per annum, this amount will jump to a phenomenal R765,697.
As Albert Einstein once said: “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.”