As a disclaimer, I am not a financial advisor and cannot provide financial advice. However, I have frequently been asked about investing in my accounting practice. I can only reflect on my own journey. My recommendation would be to prioritize repaying any outstanding debts, such as credit cards, overdrafts, and personal loans, before making any investments. These debts can significantly impact your monthly budget and eliminating them should be the first step towards sound financial planning.
If you are in this category of personal or business debt, please read this whole chapter (and re-read if you need to). If not, wonderful! Use this as a good reminder and affirmation of where you are.
Let’s roll up our sleeves and put in some sweaty minutes.
How to start repaying my current debt
It’s important to first understand the difference between good and bad debt as well as the value of good debt.
Not all debt is bad.
Buying shiny toys on loans, is bad debt. It’s fun, but bad debt.
Investing in a growing and income producing business or asset, is good debt. This debt can be written off for tax purposes. The income and most probably the asset will grow with inflation year by year. This will grow your monthly passive income as well as your capital (pension).
For this initial part, I want to focus on bad debt overall and how to start repaying it. If you are currently tied into various credit cards, overdrafts, personal loans, clothing accounts and /or vehicle finance, this information is relevant to you.
Before we can action a plan, we need to understand the overall debt situation we are finding ourselves in. Create a list of all debt and in a spreadsheet detail the capital outstanding, repayment amount and interest rate.
Now look for the smallest outstanding amount, with the highest interest rate. This is the debt you want to focus on for now. Stop any access to this loan or card and start repaying extra in this account weekly or monthly. Once this loan or card has been settled, move to the second on your list. Use both the amounts you used to pay on the previous debt as well as the amount you repaid weekly or monthly additional to the next debt. By doing this process repeatedly, you create a compound effect which will make you feel lighter every month, up to the point of potentially no debt.
Now this action plan will only work if you are still able to manage your debt. Sometimes life happens, and you fell into a massive debt trap, and you just can’t get out. It can be self-inflicted pain, through buying unnecessary items, but it can very easily happen because of a job loss or lower salary (as employee) or losing clients or a business stream of income (as business owner).
In this above-mentioned case, I would suggest considering one of two options. Debt review if you are experiencing a temporary income loss or decreased income. Looking at a potential voluntary sequestration. This process is not at all as haunting as you might believe. With the assistance of a professional debt counselor or sequestrator, you will soon be able to start your new financial life free of stress.
Let’s get back on track.
Most of us can lower our means and spending habits, and by doing that making sure we have additional income available to start this process.
Just a quick few ideas and examples to free up cash: (please don't be mad at me :)
This is what smoking potential cost you per month.:
- As per my friend Chat GTP the average cost of a packet of cigarettes in South Africa is around ZAR 40 to ZAR 45 (South African Rand).
- Let’s assume you smoke one packet per day = R 1,200 per month
Binge drinking regularly?
This is what regular drinking potential cost you per month.:
- Once again, my friend Chat GTP come to the rescue. The average consumption for people over 15 years old in South Africa was 7.5 liters of alcohol per year (or about 0.6 liters per month) in 2016.
- Let’s be conservative and work on 1 bottle red wine per week and a bottle of Olof Bergh Brandy per week, we are looking at another roughly R 1,500 per month.
These examples can go on and on, but you catch my drift.
Action plan to implement:
Create an excel spreadsheet with all debt, reflecting the settlements amounts, repayment amounts and interest applicable.
Next, create your action plan of repaying the first smallest and highest interest debt.
How to do my personal and business budget
Budget and investments for each account will have to be done on personal preference and situation.
Invest in what you enjoy and ignore the avenues that you do not.
For me. I dislike retirement annuities and prefer to investment in my home loans. I don’t invest in savings plans rather utilize closely watched shares as a savings vehicle.
Some might like this, others will not.
Some might like playing with Crypto, the new buzz word.
The answer is, CONSISTANCY. Whatever you choose as your investment strategy, be consistent in allocating funds every month.
PAY yourself first. No this does not mean don’t pay your creditors, and only pay yourself. It does not say we must be reckless with finances.
PAY yourself first, means that you will allocate monthly funds to your investment of choice. When you receive your weekly, fortnightly or monthly salary, fund your investment first.
In his book, The Automatic Millionaire, David Bach explains how you can become a millionaire by following a few simple steps and making small, automatic changes to your financial habits. The book emphasizes the importance of "paying yourself first" by automating savings and investments, rather than relying on willpower to save money.
On your internet bank you can setup your one scheduled payment to be done on a specific date and as a recurring occurrence.
With this said, let’s explore a way to allocate investments within a personal budget.
A ratio that worked well for me and others over time, is the 50/30/20 principle:
The 50/30/20 rule suggests that you should allocate your after-tax income into three broad categories:
Let’s roll up our sleeves and deconstruct this method.
The first portion - 50%
The first 50% is a detailed list of your monthly overheads. Your needs and absolute must have expenses. Compile a list of each item as well as the amount of the expenses.
A few examples:
Vehicle instalment and expenses
Telephone and internet
Short term insurance
The second portion - 30%
The second portion is allocated to fun, games and nice to haves.
Exploring new towns or restaurants.
Allocating funds for your hobbies.
Life without enjoyment is no life at all.
The third portion - 20%
This portion of your money should be allocated to investments or paying off debt.
I have discussed this in various chapters in this book. In time, you might want to look at this percentage and adjust it upwards. As your income grows, don’t let your first 50% increase as well. Our net asset value will only grow if we manage our living expenses.
Below is what I prefer to do as an investment strategy:
Allocate 30% of my monthly personal income to investments.
20% to home loans. I like to use a specific home loan because it keeps me focused and motivated.
10% to more risky opportunities. Something like closely watched shares. A new business ventures. Crypto or NFTs if that is for you.
The value is in doing this. Take the action. Pay yourself first.
Action plan to implement:
Overview your personal budget.
How will you pay yourself first?
In what do you want to invest, that you enjoy?
Once you have this answer, setup a scheduled recurring payment plan on your internet banking, to AUTOMATICALY send the allocated funds to your investment of choice. Make sure this happens on the same day as you planned your weekly, fortnightly, or monthly salary.
Some last notes while preparing your budget.
Consistent efforts over a long period of time can lead to significant dividends or benefits in the future. Its not that once off investment efforts that will show the dividends, but the consistent automatic weekly or monthly amounts compounded over time.
In the Richest man in Babylon the important statement is made. Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow. The sooner your plant that seed the sooner the tree grow. The more faithful you nourish and water that tree with consistent savings, the sooner you may bask in contentment beneath its shade.
This is where the Rule of 72 provides the perfect example. The rule of 72 is a mathematical shortcut that helps estimate the time it takes for an investment to double in value at a given rate of return. The rule states that if you divide the number 72 by the annual rate of return, the result will be the approximate number of years it takes for the investment to double in value.
For example, if you have an investment that earns a 10% annual rate of return, you can use the Rule of 72 to estimate that it will take approximately 7.2 years (72 divided by 10) for the investment to double in value.
This is a useful tool for understanding the power of compound interest and the potential growth of investments over time. It can be used to compare different investment options and to set long-term financial goals.