Adopting a disciplined approach to saving and spending will reap rewards now and particularly when you retire.
Now that the festive season is behind us and the new year has got off to a brisk start, we must steal a moment to pause. We should grab this opportunity to take stock and reflect on our financial position, expectations and strategy. We have probably got a good idea of what we want from life, and part of it is financial independence, particularly in old age when we want to enjoy the life of the idle rich! There is no magical way of achieving this; it comes from hard work and discipline.
Having settled our holiday bills, it is time to sit down and prepare a budget for the ensuing year that takes into account long- and short-term objectives. There is a remarkable simplicity to financial planning and the expectations that can realistically be achieved. The only clear necessity is that the budget balances; you should not allow yourself the luxury of a deficit.
As far as the long term is concerned, we all need somewhere to live, so we should be somewhere on the property ownership map. It is important that we are focused on paying off the mortgage bond as quickly as possible without causing financial distress. Secondly, we all need, or certainly expect to own, a vehicle. Make sure you select one that is affordable so that the repayments are manageable.
Next we have a responsibility to ensure that we make provision for our old age - South Africa is certainly not a welfare state. This is one of the most important responsibilities that we owe ourselves, and it is never too early to begin. Do not be lulled into a false sense of security that you cannot afford it at present and you will attend to it at some time in the future. The truth is that you probably never will, or that when you finally do, it will be too late and the sum that can be saved will be hopelessly inadequate.
Start saving for your retirement as soon as you begin permanent employment, even if you have a pension plan, and even if the amount that you can save seems to be relatively small to you. Never forget the important principle of compounding interest and capital growth - small acorns grow into magnificent and huge oak trees. It is common cause that the sooner you start, the better off you will be in the end, even if you only get off to a modest start. It is also well known that you can never make up for lost time. The financial implications of beginning a savings regime at 20 years of age or delaying it until you are 30 are a huge cavern.
A very important discipline is to learn from an early age to live within your means. Be circumspect in making big financial commitments. Before committing yourself to expenditure, be clear that you have fully considered the importance of the expense, how badly it is required and whether it is affordable in your scheme of things. Try to avoid long-term credit for short-term purchases; it is very expensive in an environment of increasing interest rates and can also compromise your other savings objectives. So keep your credit card purchases to a level that you can easily pay off every month.
If you are married with children, try to make some provision for the costs of education. The one thing that we really owe our kids is a decent education, and this comes at a price. It would also be nice - if you are in the position to - to make provision for your annual vacation and build up an emergency fund.
All of this advice probably seems self-evident and rather simplistic, but the reality is that most people do not spend adequate time taking stock of their financial position and ensuring that they are financially independent when retirement becomes a reality. The truth is that no matter how much or how little we earn, if we develop a culture of saving there is no need to be financially embarrassed or dependent on your family in later life.
It is better to start as soon as possible even though it is more difficult when you are younger with competing financial and lifestyle demands. But the rewards of an early start are staggering. If you did not begin early, do not throw up your hands and surrender; it is never too late to start saving.
- David Sylvester is the chairman of the Shareholders' Association, telephone 021 686 7567.
This article was first published in Personal Finance magazine, 2nd Quarter 2007. See what's in our latest issue