Achieving wealth even when times are tough

The Association for Savings and Investments South Africa (ASISA) noted that during tough economic times, people need to take heed of their spending habits. When times are tough, it is not the time to take desperate measures, such as investing in ‘get rich quick schemes’, but rather to analyse your everyday spending decisions and financial habits.

As July is Savings Month, Peter Dempsey, deputy CEO of ASISA, stated that this is the perfect time to “look at practical ways in which you can achieve the wealth you need even though times are tough.”

According to Dempsey, as South Africans face increasing financial pressures, they are vulnerable to claims of high returns offered by pyramid and Ponzi schemes.

“However, these schemes inevitably collapse, leaving investors with nothing. You must be careful to distinguish between legitimate savings and investment products offered by regulated financial institutions and schemes that make unrealistic promises where you could lose your savings without recourse,” warned Dempsey.

Being careful with your money

When it comes to investing in legitimate financial products, the service providers must be able to fully disclose that is done with the money entrusted to them by investors, as well as how the product is administered, pointed out ASISA.

“Unfortunately, there is no magical solution to achieving the wealth you need. The real path to riches lies in re-evaluating your financial priorities, and taking control of your spending each and every day,” revealed Dempsey.

He added: “Measuring your wealth is not about owning the latest luxury car, technology or designer clothing. It’s about knowing that you will be able to live comfortably and independently for your whole life, and provide for yourself and your family no matter what comes your way.”

When evaluating your finances, you need to think “about what wealth and riches really means, and managing your expectations.”

Dempsey offered five tips to help you take control of your finances now to grow your wealth for the future.

1. Live within your means

One reason people may not be able to save is because they are not aware what they are spending. “Most people have not accounted for those small everyday expenses which over time are tipping them into financial trouble, much like having a slow puncture on a car. In difficult economic times, you must understand exactly where your money is going through a detailed budget before you can make necessary decisions,” said Dempsey.

When you have drawn up your budget, you need to cut back on wasteful expenditure and bring your spending in line with your income. “While this seems obvious, South Africans are plagued by a culture of conspicuous consumption, continuing to fund extravagant lifestyles on credit,” revealed Dempsey.

Furthermore, if you are to maintain your lifestyle into retirement, you are going to have to discern between wants and needs and maintain a healthy budget over the long term.

2. Rid yourself of debt

As interest rates increase, the cost of debt continues to rise. “Having debt on your personal balance sheet is like having widening holes in the bottom of a bucket where your money keeps flowing through. You will be able to accumulate wealth and fill your bucket far more quickly once you have plugged the holes,” stated Dempsey.

One of the ways to deal with debt is to prioritise repaying short term debt with high interest rates, such as store cards and credit cards. Once this has been paid off, you can focus on your longer term debt, such as a mortgage.

In addition, Dempsey suggested funnelling any salary increases or bonuses into repaying debt rather than purchasing new and expensive wants.

“Your home is an appreciating asset, which means it should grow in value over time. By repaying your mortgage bond more quickly, you are therefore essentially paying yourself in a more meaningful way for the future,” added Dempsey.

3. Pay yourself first

It is important to pay yourself first when money comes in. However, this does not meaning purchasing the latest items that has caught your eye. “While not nearly as glamorous, paying yourself first means paying your future self first, and making sure that you have provided for unexpected life events such as death or disability, as well as planned events such as retirement,” explained Dempsey.

The ASISA 2013 Life and Disability Insurance Gap Study revealed that there is a shortfall of R700 000 in life cover for the average South African, while there is a disability shortfall of R1.1 million. According to Dempsey, spending money on wants and ignoring your life and disability insurance “is really just masking a hole at the core of your finances. You do not want to discover that you and your family are not adequately provided for when it is too late.”

In addition, one aspect of building wealth is saving towards an emergency fund. This will assist in covering unexpected expenses without having to get into debt.

“You may be finding it difficult to save with rising prices putting a strain on your income, but one important trick is to save and invest first and then spend what is left. Make saving first a habit by automating your savings at the beginning of the month, so that you are not tempted into spending the entirety of your funds,” advised Dempsey.

4. Invest wisely

Building wealth does not automatically translate into a large bank account. With rising costs and inflation the earning power of your savings may diminish over time. Therefore, you should invest your money and allow it to grow for the future.

Dempsey explained: “This means investing your money with financially stable institutions and in regulated savings and investment products, rather than questionable pyramid or ponzi schemes offering unrealistic returns that will inevitably fall apart.”

It is important to note that investments are generally long term savings vehicles, which means that a smaller investment over a longer term may earn more than a larger investment over a shorter term.

“In times of market volatility, investors tend to panic and withdraw their investments. However, it is vital that you take a long-term view with your money, as withdrawing also means that you may lock in any losses and lose out on the benefits of market recoveries for your investments,” added Dempsey.

5. Consult a financial adviser

A final and important point to remember is to consult with a qualified and trusted financial advisor. They will be able to help you select the best investment products to meet your financial goals. “Research show us that advised investors remain more disciplined about decisions to spend, save and invest, better financially protected and have more assets,” revealed Dempsey.

He added: “Ultimately, consulting a financial advisor instead of gambling with get rich quick schemes is one of the most important financial steps you can take for the future, as your advisor will help you to build truly meaningful wealth in a sustainable manner.”

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