Mastering the Money Matrix

Get the Big picture!

Those “in the know” tell us that money management is a simple exercise. You earn a salary, you pay for your stuff and you have a little left over for fun and savings-easy enough. This story is true for those weird people that have virtues called discipline and self-control. These people can pass upon anything, and I mean anything; without experiencing the remotest feelings of desire or regret. They have the ability to drink tap water, instant coffee and bubble free wine.  Their phones are not smart and their PC,- with the screen that rivals the size of Starship Enterprises command station, works fine, thank you very much.  For the rest of us money management is a pain in the proverbial.

The domino effect

The elements that make up a good financial plan are easy to attain and understand, but skill and a desire to crack the code, is needed to understand how they are interlinked and how they affect each other. Every financial decision has an impact on our financial “cores”. Our financial life can be divided up into the following areas. Money management, Credit Management, Short and Long term risk, Medical, Property investments, Banking Asset management (appreciating and depreciating) Tax, Retirement and Estate planning, Money and relationships

A seemingly innocent action in one area of our financial lives will cause a domino effect in another. Let’s say we decide to buy a new car and the repayment is R4000 per month for 60 months, and our old car was paid off. Obviously we would have done some calculations to assess whether the purchase was affordable. The decision would have the following impact on our finances

1.  The insurance premium would probably increase by at least R200 pm to accommodate the higher value.
2.  We would have to install a tracking device at R120 pm
3.  We may have to increase our life cover to accommodate the extra debt.
4.  We would have R4000 less in our budget, so this would in all likely hood shrink our disposable income and leave no room for unexpected expenses.
5.  The R170,000 we spent on our new wheels means that we will have paid R78,999 in interest charges over the five year lease.
6. If interest rates went up two percent then we would have to find an additional R182 per month to pay for the car.
7.  If we had a home bond in addition to our car loan of say R800,000 then a 2 % increase in rates would mean an extra R1181.00 out of our budget.

So in other words (aside from the direct increases with the new car purchase) if interest rates went up, the R4000 pm we decided we could afford, could turn into R4182 pm, which could be manageable,  but the extra R1180 on our bond payments may push us into financial crisis, and our cheques may develop some rubber like qualities.

Food for thought

If on the other hand, we had rather spent a little on the maintenance of our old cars; taken that R4000 per month and invested it over 5 years at 10% we would have accumulated R312,329. If we continued to save this for another 5 years it would turn into R826, 206 and R4000 pm invested for twenty years it would reach a staggering R3, 062787.

In five years-time our R170,000 vehicle would be worth less than R70,000. So in other words, a decision to buy a new car will have conservatively cost us three million in lost investment opportunity and this is just ONE purchase. If we took the more restrained approach of hanging onto our old wheels for a little longer, in 5 years-time our salary would have probably increased to the point where we could afford to buy a new car.

R3 million sounds like serious cash, and it is, but we must not forget the inflation monster. Twenty years from now that R3 million will only be worth around R400 000 in today’s money but that erosion can be prevented by growing your investment savings each year by the rate of inflation.

Get a helicopter view

The impact of just one financial decision has profound implications, and this is why we need to get a helicopter view of the world of money. Here is another example. Jenny is thirty years old; she is fit and healthy and has a great job. Her company does not provide her with a medical aid or disability benefits however, so she decides to go out and get some quotes. She gets a quote for R1200 per month for a hospital plan. “No way” she says, that’s too much cash for someone who gets the odd cold once a year and it’s not like I am a sky diver. In any event she has saved up R220, 000 in unit trusts, so she puts it off. On her way to work, a taxi driver who fancies himself as the next Stig on Top Gear, plants his vehicle in her door. She is lucky, she survives but her leg is broken and her wrist is sprained. Jenny has to stay in hospital for longer than usual due to complications. She is presented with a bill of R200,000 for the hospital stay. There goes her savings. Had she kept the that R200, 000 invested, she would have amassed R7,7000,000 of  retirement funds double ouch.

A seemingly small decision can have a massive impact. So when you want to make a financial decision draw a flow chart with boxes. In each one write down your core financial areas and try and predict what will happen to them when you make a move with your money.

Budgets are not for sissies

The word budget conjures up the image of a sixty’s couple with dire hairstyles, sitting at a steel and plastic kitchen table working out how much they will be spending on their next packet of frozen peas. Not the most inspiring thing to do in your free time. The good news is, a budget does not have to be a bore, in fact if we master the skill, it can give us a head start to making our first million.  If you have moved out of home and now have your own nest, you may have had a taste of how things can go south if you blow your budget on a serious night out. Get this simple money management skill sorted and eating cereal every night for dinner will become a distant memory.

Financial planning or budgeting – what’s the difference?

Without getting too technical, financial planning is making provision for your financial future, i.e. retirement and the building of personal wealth. Budgeting is the nuts and bolts of the strategy you will use to achieve your goals.

Financial planning is a long term process and its ultimate goal is to allow us to retire young with wads of cash hanging from pockets. However it is important to have short and medium term goals too. For example, a short term goal may be to go and see the Monaco Grand Prix, a medium term goal could be to buy a house, but if we don’t plan for these expenses by implementing a savings strategy, they will difficult to achieve. This is because all the other things we want in between, hijacks our money and nothing gets saved.

So once we have documented our financial goals, we need to work out the budget. The day-to-day plan will ensure that we get to our destination. When those things are taken care of, then and only then, can we work out how much we are going to spend on our lifestyle. Research the various savings plans on offer to find one to suit your needs

Why most budgets Bomb.

Most people start out by making a list of all their expenses and then their income. Usually two thirds of the way down the list, expenses start to exceed income, so we go back to the top and resign ourselves to buying cheap coffee and sandwich spread. Once our diet is well and truly revolting, we may turn to our meagre savings plan to cover the shortfalls. The savings plan is usually the first casualty of a stressed budget. A budget is much more than just listing our commitments, it should be a tool to help us get more out of our available resources. Therefore we should rather call it a spending plan, this implies that there is a goal to everything we spend our money on, including saving and debt elimination. In other words it implies increased possibilities rather than limitations. The reason people can’t stick to a budget is because they don’t make provision for getting out of debt, most budgets keep the status quo. A spending plan will progressively free up cash flow and help us to build wealth. The important thing here is to keep yourself focussed on the benefits of what you will achieve by doing this. We have a natural aversion to loss (saving is perceived as a short term loss) so we need to keep positive.

How to design a spending plan and still have the Gucci’s

The key to a successful plan is to recognise that your main focus should be to save and eliminate debt. If you are in the fortunate (and rare) position of not having any debt you can and should start a savings plan right away. There are many different plans that are tailor made for your requirements.

If you are in debt and need to get it under control and believe it or not you can start with as little as R200 per month. Some people claim that there is no way they can find this in their budgets, however cutting out a Friday night excursion with their pals will take care of that obstacle instantly. We need to think about all the luxury items that we buy each week that can be cut without too much pain. It could be a daily trip to the deli for a designer Latte, a few packs of cigarettes, or a mall trawl with friends.

Make a list of all your short-term debt starting with the smallest payment to the largest one. Take that R200 that you have found and start paying off the smallest debt first. Then when that debt is paid (let’s say it was a R100 p m pharmacy account over 6 months) add that instalment to the R200 and tackle the next smallest debt. Keep doing this and you will soon realise the awesome power of the “snowball effect”.

Your credit limit is not a target

One of the most common excuses (and lamest!) for not having a well thought out money management strategy is “lack of time”. Come on, how many hours a week do you waste in front of the TV, hanging in shopping malls, face stalking Er I mean booking, or socialising with friends? Plenty! We spend over 100,000 hours of our lives working is it too much to ask for an hour a week to make our money work for us?

Get disciplined.

Self-discipline is most definitely the key to reducing debts and making lots of cash. Usually someone who is undisciplined about money is undisciplined about life in general. So if we scratch our heads in confusion about what life throws at us, it’s time to ask some serious questions about our habits. If we stop to examine our motivations,we will soon realise that we have the freedom and power to get control and fight our Impulses.

• Realise that the most convenient method of building one’s wealth is by living beneath our means.
•  Always ask yourself this question before spending “If I buy this will it compromise my savings?” Will it change who I am as a person or will my friends really be that impressed?
• Avoid buying on impulse. Sleep on big ticket items. If we really need it, it will most definitely not slip our minds. If we give it a few days, we will probably forget about it or be relieved that we did not buy it.
• If you want some real motivation to get out of debt and save, go and see a financial advisor and ask him or her how much you will need to save in order to retire. If you have a figure in your head multiply it by 5 and you may be closer to the mark. Some sedatives or a stiff drink may help soften the blow.

Denial and procrastination is another big enemy when it comes to managing money effectively. Once we have set up a spending plan, we should get into action mode right away. The day we receive our pay cheque, is the day we start implementing the plan. You can do this.