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The 10 most valuable financial habits

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It is rare for success to occur overnight. Specifically, financial success requires time and a set of good financial habits. Several routine practices can help you manage your money more effectively and respond to financial challenges more effectively if you are striving for financial freedom. 

Save consistently

An employed 25-year-old who plans to retire at age 65 has 480 pay checks available to fund his or her retirement – a life stage that may last for 35 years. Aristotle said, “Good habits formed in youth make all the difference”, and this is certainly true when it comes to investing. When you begin earning a salary, invest a portion of it into an appropriate investment portfolio as soon as you can. Investing early in your career allows you to take advantage of compound interest for a longer period of time, exposing your capital to the power of compound interest. You will need to invest more as a percentage of your income if you delay your investment journey by even a few years, so the longer you delay, the harder it is to make up for lost time. Make sure you invest early and consistently.

Food for thought: ‘Saving is itself an education; it fosters every virtue, teaches self-denial, cultivates order, trains to forethought, and broadens the mind.’ (Thornton T. Munger)

Have financial goals that support your lifestyle

Develop a financial plan that can help you achieve your life goals. Writing your goals down can be a powerful way to commit to them and hold yourself accountable for achieving them. Your financial plan and goals should be reviewed regularly as your circumstances change. A financial advisor should develop a documented, visual plan that clearly outlines how to achieve your goals and measure your successes (or failures) at each meeting thereafter.

The human race is not lazy. Goals that do not inspire them are impotent.’ (Tony Robbins)

Protect your risk

As you accumulate wealth, it is important to protect yourself against the risk of death, disability or severe illness. It is important to remember that your future wealth depends on your ability to earn an income. Get expert advice from an independent financial advisor who can help quantify the amount of cover you need and point you towards a reputable insurer. When you are young and healthy, long-term insurance is more cost-effective, so don’t wait. Medical conditions or illnesses that develop in the interim can affect your underwriting and premium, so get covered as soon as possible. Ensure that your cover remains aligned with your personal needs as your circumstances change. When you meet with your financial planner, you should discuss reviewing and adjusting your long-term insurance coverage.

It’s impossible to protect yourself 100%. It’s about protecting yourself and mitigating risk as much as possible. ‘Risk cannot be eradicated.’ (Kevin Mitnick)

Manage your debt responsibly

Debt may be inevitable, but managing it responsibly is not. Controlling your debt and keeping it within control will enhance your credit score and put you in a better position to obtain more favourable financing terms if you want to take out a home loan in the future. Consolidate your short-term debt through a single credit facility rather than taking out multiple lines of credit. You may have difficulty keeping track of payments and interest-free periods if you have too many credit cards and retail accounts. Keep your short-term, high-cost debt under control by repaying more than the minimum amount each month. To ensure that your credit score has not been affected by fraudulent activity, keep an eye on your credit score. Avoid burying your head in the sand if you want to reduce debt. Intentional management and time are required to eliminate your debt.

Food for thought: ‘Debt is the slavery of the free.’ (Publilius Syrus) 

Spend less than you earn

Lowering your expenditures is easier said than done. Having a consistent ‘profit margin’ in your monthly budget is the only way to build wealth. Investing (i.e. paying yourself first) requires some soul-searching about what is most important to you. Budgeting boils down to deciding what you want now versus what you want most in a world where we can have anything. Commit to reviewing your budget regularly and tracking your expenditures once you have prepared a realistic budget.

Food for thought: ‘There is no dignity quite so impressive, and no one independence quite so important, as living within your means.’ (Calvin Coolidge)

Plan for the unexpected

Despite the fact that it’s impossible to prepare for everything, your personal circumstances can give you a sense of what can potentially go wrong. Most people, unless they have an emergency fund, will not be able to handle a sick pet, a burst geyser, a dinged vehicle, a broken appliance, retrenchment, or medical expenses not covered by medical aid. Depending on your situation, you’ll need emergency capital. If you already have pet insurance, short-term insurance, gap coverage, and income protection, assess your needs and fund accordingly. Review your financial plan if your circumstances have changed since you last reviewed it.

Food for thought: ‘Because you never know when the day before is the day before. Prepare for tomorrow.’ (Bobby Akart)

Be tax efficient

There are several ways for taxpayers to reduce their tax liabilities, and it’s advisable to take advantage of them. Tax planning is an important part of your overall financial plan, so don’t leave ‘free money’ on the table. Your advisor can guide you on how to structure your portfolio in the most tax-efficient manner while allowing you to contribute tax-free to an approved retirement fund. Regularly revisit your tax planning since tax planning isn’t a once-off exercise.

Food for thought: ‘The hardest thing to understand in the world is income tax.’ (Albert Einstein)

Remain composed

Human emotions play an important role in financial planning. Financial advisors play a key role in helping clients make better financial decisions by using behavioural finance research. Even the most cautious investors can become speculators due to volatility in the investment markets. Fear and greed are the greatest drivers of impulsive financial decisions, and it is during these times that a financial advisor can play an important role in maintaining composure. Make it a habit to ignore market volatility if you’re investing for the long term. Market fluctuations are inevitable. Don’t watch the market during a downturn, but make sure you’re invested for a recovery.

Food for thought: Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas. (Paul Samuelson) 

Look after your health

The best investment you can make for your future self is taking care of your health. Consider getting gap cover to help fund service provider costs that exceed medical aid tariffs to ensure you have access to the best possible health care. A number of diseases and chronic conditions are lifestyle-related and can result in enormous costs in terms of care, treatment, and lost income. A poor lifestyle can cause obesity, diabetes type II, strokes, heart disease, some cancers, chronic obstructive pulmonary disease, and cirrhosis, so educate yourself, stay covered, and stay healthy.

Food for thought: ‘It is health that is real wealth and not pieces of gold and silver.’ (Mahatma Gandhi)

Stay educated

If you are a taxpayer and investor, it makes sense to keep up-to-date with financial affairs, regardless of whether you have a natural affinity for or interest in finance. Poor financial decisions are often the result of people not knowing what they didn’t know. Even though your independent advisor should keep you informed regarding your financial situation, it is important for you to take responsibility for your own financial education. Commit to reading at least one financial planning article each week from a reputable, online financial publication.

Food for thought: ‘Knowledge is of no value unless you put it to practice.’ (Anton Chekov)

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