The first step in financial planning is a bit morbid, focusing on the bad stuff that happens. Unfortunately we have to prepare for the bad stuff, since we have no control over it.
RETIREMENT = FINANCIAL FREEDOM?
We also need to prepare for the good stuff, and we have more control over that. That makes it exciting. Step 2 of financial planning we look at financial freedom and retirement. We prepare for the future we desire.
It is this step that made me leave the financial planning industry. There is a story to it. You can skip the story.
I was helping a single woman just under 5 years from retirement. My advice was to repay her bond before she invested in another endowment policy. I thought she could afford R250/month. That amount would settle the bond in just under 5 years and she can retire debt free. My reasoning was simple: paying the bond does not entail commissions and admin costs, she gets full benefit of the R250 and the bond rate was more than she could reasonable expect in a 5 year endowment. She was focused on another endowment policy. It took me 30 minutes before she shifted the focus and understood what I told her. She sat back, eyes shining with a new insight, and said to me: “This is good advice. How do you get paid for it?”
When I drove away, I realised I am not making money because I am giving advice and not selling products. That was when I left the industry.
END OF STORY
THIS IS MY OPINION. BEFORE YOU DO ANYTHING TO YOUR PORTFOLIO AT ALL, FIRST CONSULT WITH A FINANCIAL ADVISOR. I HAVE SAID IT REPEATEDLY.
CAN YOU SAVE YOURSELF RICH?
I do not think it is possible to save oneself into financial freedom. The financial services industry is focused on investing in endowment policies, retirement annuities, pension funds, mutual funds or unit trusts.
What we are essentially saying is that we take money from our monthly income (salary) and putting it into some form of investment with the dream that the money would grow to such an extent that we can one day use it to generate an income. I just do not see it working.
What is worse, we often invest money into these instruments while paying for debt that has a much higher interest rate than the growth we may expect form any such investment! I see it as borrowing money at a high rate to invest at a lower rate.
1. This is a very narrow perspective – discuss it with an advisor while planning;
2. I am not against these products, it is rather the order of things that I am challenging.
How do I want to do it?
The Financial Services industry generally wants us to invest for capital growth. That is what any share or stock based investment is. It is a capital growth investment.
But we need income to live! Cash flow is the name of the financial game. When you go to a bank for a loan, they ask about your income, not your assets. In fact, you can get a loan without having assets. The banks know if you have a cash flow, you can repay the loan.
And my question is simple: if we know we need cash flow to live, why do we invest for capital growth first? Why do we not focus on cash flow and building cash flow through investments? The quicker our cash flow from investments are enough to sustain our standard of living. the sooner we are financially free! That should be the focus.
IN THE PRESENT
What I love about this focus, is that is in the now. When I look at the cash flow from investments, I know what it is TODAY. I do not need to make assumptions about inflation and investment returns, things that I cannot control.
I am not writing here for the CEO’s of big companies who have good salaries, excellent company pension funds and share options. I am writing for people earning a salary in a normal job. Teachers, doctors, shop assistants – people working for themselves, probably 90% of the population!
Here is the thing: if you focus on cash flow for investing before capital growth, you will not need more life- and disability cover every year! Since you have a passive, investment or portfolio income, you do not need insurance products to provide capital to get an income! Over time you will save a lot of money on risk insurance!
I am well aware that stocks or shares pay dividends. Have you ever looked at dividend yields and calculated how much capital you need to get the income you require from dividends? And ask the financial advisor how much capital you need to get the income you need.
What I am saying is: traditional financial planning starts with this question: “At what age do you want to retire?” Then the planning starts to build enough capital to able to retire at that age. Unfortunately, life happens. People lose jobs, people get sick, markets go up and down. CEO’s of companies commit fraud. The world gets hit by pandemics. And seldomly the plans work as planned.
CHANGE THE FOCUS
I want to change the focus and start with these questions: “How much income do you need today to sustain your standard of living? What can we do now to generate an income to replace your salary?”
Think about it, there is a huge difference. And let’s face it, if you do not have the income that you need, you can never retire.
Now you have lots of questions and few answers. I want it like that. I want you to think about what I said. Think critically. Discuss it with your financial advisor.
And come back here, I will give my ideas in later posts.