Financial Discipline

If you should receive all the money you would ever earn at birth, how would you spend it?

So let us say that your budget is R20 000 per month for 90 years. That will give you a lump sum at birth of R21 600 000. Now anybody receiving this amount of money at birth would probably die on the spot. But let us see what it really means.

Point number 1: With an inflation rate of 6% per annum, R21 600 000 today will buy you only R114 000 worth of goods in 90 years’ time! So you will have to earn a return on this amount of at least 6% to preserve the buying power of the money. This translates into an investment OTHER than a bank account because interest after tax will give you LESS than inflation.

Point number 2: There will be times where you will have to spend way more than R20 000 in a month to support your lifestyle for example when you buy a car or a house. The implication is that you will have to carry some of the monthly allowance over to an investment to prepare for those occasions. You will also have to determine how much you have to save every month to provide for a specific car or house BEFORE you buy it.

Point number 3: You will soon realize that as you grow older, your financial needs increases due to education, health and comfort reasons. When you are young the doctor can wait. You can sleep in a tent and only need to eat something to satisfy your hunger. In other words, you do not need the fancy stuff. This will give you the opportunity to make use of the power of compounding where if you leave the money in your investment, you will earn interest on the interest! This is where most people will fall into the trap of BUYING more than they need for whatever crazy reason!

Lastly, you do not know how old you are going to get so you will have to evaluate your financial plan continuously to ensure that you do not dip into your reserves to such an extent that you will run out of capital before you die.

THE SAME RULES APPLY for all of us earning our income as we go on and not in one single lump sum!

In summary:

·        Inflation will be your biggest enemy.

·        Provide for the big ticket items and make sure you can afford them.

·        Don’t waste money just because you have it. The lean years will come.

·        Formulate a financial plan early on and evaluate it regularly.