I recently got home from work, only to find my eldest daughter in tears. Upon enquiry as to why she was so sad, she told me that she had a massive university assignment due and that this particular assignment was so huge, that with the time she had left and the quantity of work that still had to be done, she wouldn’t be able to finish on time. I think we have all been there before at some point. It doesn’t matter if it’s an assignment, a large sports event or preparing for your retirement, we all know the worry and fear that accompanies a tight deadline. I told my daughter to divide the assignment up into smaller sections and to finish each smaller section before moving onto the next one, as opposed to focusing on the assignment in its entirety.

Shortly after saying that, I realised that the same principle actually applies to our personal wealth. The financial aspect of our lives in its entirety is such a vast concept and can be so overwhelming, that it’s easy to understand why it causes so much anxiety and distress. Where should I start? To whom should I listen? Although this task can be broken down into lots of little pieces, I would like to focus on five smaller wealth challenges that can help combat the anxiety that accompanies financial planning:

1. INVEST IN A RETIREMENT ANNUITY (RA)

If your employer does not currently offer retirement benefits, you seriously have to consider investing in a retirement annuity. It’s not just a disciplined savings method, but the allowable tax-deductible percentage (personal income tax) of the greater of your taxable income or remuneration, currently amounts to 27.5%, with an annual maximum of R350 000.

That means that you can enjoy up to 27.5% of your income as an allowable tax deduction, just by making use of an RA to save for your retirement.

2. WHAT ABOUT YOUR EMERGENCY FUND?

We all know the saying, “Life happens”, and we have all experienced some or other event that was completely out of our control, and that ended up costing us money that we didn’t have at the time. We take out short-term insurance to cover us against losses or damage to personal items. We take out medical cover against unforeseen medical expenses. But do you have an emergency fund to cover you against unforeseen expenses, such as your car breaking down without warning outside of its warranty?

Most experts recommend having at least three to six months’ worth of personal expenses set aside in an emergency fund. This would normally be invested in something like a savings account, or money market account, where market volatility isn’t an issue and where you can gain access to your funds within 48 to 72 hours.

“BUILDING TOWARDS YOUR PERSONAL WEALTH, THEREFORE, DOESN’T JUST MEAN YOU HAVE TO PAY SOMEONE TO HELP YOU ACHIEVE YOUR FINANCIAL GOALS. ON THE CONTRARY, AT LEAST THREE OF THESE FOUR TYPES OF WEALTH, REQUIRES YOU TO INVEST IN YOURSELF”

3. INVEST IN YOURSELF

James Clear, author of the best-seller, Atomic Habits, summarised four types of wealth perfectly:

• Financial wealth (money)
• Social wealth (status)
• Time wealth (freedom)
• Physical wealth (health)

Building towards your personal wealth, therefore, doesn’t just mean you have to pay someone to help you achieve your financial goals. On the contrary, at least three of these four types of wealth require you to invest in yourself.

4. ARE YOUR “CONTAINERS” FULL ENOUGH?

You should, in fact, have three “containers” or wealth strategies, and these containers are not equal in size.

The first container is your income strategy container and should contain your income and capital requirements for the first three years. These funds are normally allocated between cash and income funds.

Your second container is your wealth preservation strategy container and should contain your income and capital requirements from years four to six. These funds usually have an equity allocation of between 30% and 40% with a goal to achieve returns in excess of inflation plus 3% over a rolling three-year period.

The third container, called your wealth creation strategy container, should contain the balance of your capital not required for income and capital requirements between years one and six and is normally allocated to long-term investments in balanced- and equity funds. These funds should aim to deliver returns of inflation plus 4% to 7% over a term of longer than six years.

5. DIVERSIFY YOUR RISK

Never place all your eggs in one basket. It doesn’t matter if you’re an experienced investor, or whether you’re just starting, always ensure that your risk is well diversified. We live in an era where we can invest in a variety of asset classes, service providers or countries at the press of a button. Why would you choose to focus on only one area, and increase your risk in the process?

I find that more and more experts are recommending to clients that based on the past few years’ tough economic environment, their clients should now withdraw all funds from their local investments and invest those funds in the “better-performing” USA. These very people also seem to forget that between May 1999 and May 2009, the USA didn’t only NOT show any growth in rand-terms, but actually delivered negative performance over that period.

It just so happens that South Africa has one of the lowest correlations with the USA, which means that you cannot always draw a parallel between their economic performances. If you had invested 50% of your capital in SA and 50% of your capital in the US 20 years ago, SA would have been responsible for your portfolio’s performance in the first 10 years while the USA suffered, and the USA would have been responsible for good performance over the last 10 years while SA has been suffering. Investing in both countries, therefore, as opposed to only one of them, clearly seems to be the healthier option.

There is no doubt that there are a lot more than just five aspects to any healthy financial plan, and as mentioned before, the task before you, especially if you’re just starting or your lifestyle simply doesn’t allow for enough time to give it proper attention, can overwhelm you to the point of wanting to give up altogether. But start with these five tasks and take them one at a time. If you still feel overwhelmed, you can always ask a financial planner to assist you.

Disclaimer:
This is not to be used as financial advice, and always consult with your financial advisor before making any decision regarding pension fund withdrawals or transfers. These tax implications are subject to change.