We should all strive towards our eventual financial independence in life. Although there are different definitions for financial independence, what we are referring to here, is the ability to maintain your required standard of living without having to work. In other words, a situation where you have accumulated sufficient assets from which you can draw capital and/or passive income (interest and dividends) to pay your bills for the rest of your life. The biggest secret to obtaining this elusive position, is to start saving a percentage of what you earn from a very young age.
Here at JWR we have had consultations with thousands of people over the past 23 years and the majority of these people have one financial feature in common: not having been taught anything about investments at a young age. I, Gium, can attest to that in person as well. In my second year as an articled clerk at Ernst & Young, after having graduated as a chartered accountant, I still did not quite understand even the respective advantages and disadvantages of a retirement annuity and an endowment policy. And why is that, you may well ask? For the simple reason that back then, and from what we can gather even today, there were and still are no dedicated subjects in school which will teach you the basics of managing your personal finances with a view to the longer term.
The onus, therefore, rests on parents to teach their children the secrets to eventual financial independence, by following these very simple rules:
- Start early, by putting away 10% of the very first money you earn. Whether this is in the form of tips while working at the local restaurant over school holidays; or from washing your dad’s car; save 10%. If it is too little to open your own bank account, ask your parents to keep it safe for you, but keep a small journal of what they owe you. Continue this habit with everything you earn. It is not the amount that is important here, but the habit of never spending everything you earn.
- Once you start earning a salary, open an investment account and put the savings into unit trusts with some equity exposure. Leaving savings in cash with relatively low growth when you still have 70 years of life ahead of you, will not get you to financial independence.
- The strongest force and your secret ally in investments is compound interest. When you leave the interest earned – the growth – in your investment, you earn interest on interest. This phenomenon is the single biggest driver to your becoming financially independent and the longer you do this, the more and faster your investments will grow.
- Make sure you understand the difference between an asset and a liability. Buying a car may be a necessity, but a car is not normally an asset. It will depreciate in value over time and cost you money to run. Buying a property is an asset. It may also cost money to run but its value will appreciate over time, not depreciate.
- You will have to get a loan from a bank at some stage in your life, but remember that paying interest on the debt makes whatever you bought more expensive.
- You have to reach a point early in your life where you stop upgrading items by using credit, so you are always in debt, and rather upgrade using cash. If you get into the habit of always wanting a better car or bigger house and you cannot afford to do this by paying cash, just don’t do it.
There are more basic rules, but if you just remember to start young; to never stop saving; to avoid credit; and to establish a lifestyle your income can support; you will already have a very good chance of achieving financial independence.
And if you, as a parent, are uncomfortable about talking to your children about these topics, remember that we at JWR will be happy to help.