Failing to plan....

The best way to achieve something is by setting goals. When you set out on a long journey you have to start with knowing where you are going. This should be backed up by a "time/destination" plan (when are you going to be where?).

It is like the F1 qualifying sessions before the main race. The race track is divided into sections and if a car passes a specific point, they can calculate its relative position.

In the same way you can set goals for your financial life. At some stage you have to sit down and ask yourself "Where do I want to be and when?" I have recently spoken to 2 people about financial planning and was surprised by the attitude in the one case, and the level of unpreparedness in the other.

If your attitude regarding financial planning is that you do not need to think about it because you are going to work forever and earn an income to support your lifestyle, I want to make the following comments:

• What happens if you lose your job and can't find a new one because the economy collapsed, you are too old, you are replaced by better qualified people, you are replaced by a computer, and so many more!
• What happens if you are self employed and become disabled?
• What happens if you become ill and can't work for long periods of time?

My point is that there are many things that can go wrong.

If your attitude is that I am waiting for something to happen before I start planning, think again!

• Don't wait because you think that you are going to get married and that will sort things out!
• Don't forget about planning because you are still living with a bunch of people in a house or at your parents and the cost of living is seriously distorted!
• Don't wait for the dream job or salary increase, it may never come.

I believe you have to do the following: Understand what you need per month to support your standard of living. This will be the amount that covers all your costs (bond re-payments, food, education, social, sport, taxes etc.). This amount will change as time goes on but you have to understand what you spend to understand how much you need to invest in yourself to generate an appropriate income.

Let's look at an example:

JoeSoap is 30 years old and has the following expenses each month:

• Rent for flat R3 500
• Water/Lights R150
• Food R1000
• Gym membership R300
• Short term insurance R1 000
• Petrol R750
• Medical Aid R700
• Budget for car service and December holiday R500
• Disability cover R500
• Weekend social R600

The total expense per month is R9 000

90% of the people I talk to can't tell me what they spend on average per month! This is like driving without knowing how much petrol is in the car!

To spend R9 000 per month after tax, JoeSoap needs to earn R122 000 per year (R10 167 pm) before tax. If he wants to stop working now and continue spending R9 000 pm until he is 90 years old, he has to have R3 800 000 invested that earns a 2% real return (more that inflation, so if inflation is 10%, his investments have to earn 12%).

NOW JoeSoap can start putting things into perspective!

IF he wants to increase the R9 000 to R12 000 per month, he has to have R5 000 000 invested, or earn an income of R170 000 per year before tax (R14 167 pm).

IF he thinks that he can get a new job that pays R15 000 per month before tax and can work for another 20 years, with annual salary increases that is on average 5% higher than inflation, and carry on spending an inflation adjusted R9 000 pm with the balance invested, he can retire at 50 with the equivalent of R3 000 000 under investment and carry on spending the R9 000 pm (inflation adjusted) until he is 90 years old.

IF we take the same info as above but JoeSoap wants to spend R11 000 per month that increase with inflation for the rest of his life, he has to either work for another 24 years or earn R19 400 per month before tax for the 2o years, with the balance of income over expenditure invested every year.

To sum up: Doing these calculations is very easy and I can assist where needed. They are essential to know how much disability or life cover you need, how much you can spend with what you earn if you want to build up a nest egg or when you will reach a stage where you have enough investment income to change your situation from having to work to wanting to work.