The Financial Wellness Coach: Three principles on money…
Question: I want to help my children deal with money better than me. What advice can you give to help them learn good money habits?
Kenny Meiring MBA CFP is an independent financial advisor. You can contact him at Financialwellnesscoach.co.za. Please send your questions to [email protected]
First published in Daily Maverick 168 weekly newspaper.
Answers: Your question is certainly relevant. I love lecturing in front of groups on how to better manage their finances. This topic of teaching our children and grandchildren good financial habits comes up regularly.
There are three principles that are central to your financial wellbeing.
Principle 1 – You will make a limited amount of money in your life. What you spend it on will depend on the choices you make when you first start earning.
You can spend your lifelong income on debt repayment or great experiences. Unfortunately, most people end up spending too much of their lifetime income on debt repayment. Easy access to credit has led to this situation.
Are you really in need of these clothes so badly that you need to open a store credit account? Can you keep driving your car for a few more years while saving for a replacement? Should You Really Take Money From Your Home Loan To Pay For This Vacation?
If you are able to procrastinate and save for an item instead of buying it on credit, it will make a huge difference to your overall financial wellbeing.
Principle 2 – Invest part of your earnings immediately.
When I was growing up, one of the building societies (remember?) Had an ad for a special savings account that offered a higher interest rate. The ad was well received by me – it said: “Spend 90% of your money with a clear conscience”.
I took that to heart and saved 10% of my earnings. When I started working, I was able to buy an Opel Kadett for cash, while many of my friends had car loans.
This is a great principle to teach children. Save 10% of your birthday money, 10% of your pocket money and, if you get a job, 10% of your salary immediately.
It is important that you put the 10% into the investment right away. Don’t wait until the end of the month to see if you can still save up. Trust me, the money will go away.
Principle 3 – poor people work for money; Rich people get money to work for her.
A key element to getting rich is using the power of compound interest. With compound interest, you get interest on your interest. The longer you invest, the more your money will grow.
Therefore, it makes sense to start investing as early as possible.
The sooner you start, the more compound interest will add to your wealth.
This is best illustrated with an example. Consider a number of triplets – Larry, Moe, and Curly (and their sister Susan, which we will get into later):
Larry invests R10,000 a year for 40 years. The total investment is R400,000.
Moe invests R15,000 annually for 30 years. The total investment is R450,000.
Curly invests R20,000 annually for 25 years. The total investment is R500,000.
Now, if every investment produces a return of 5% per annum, then in the first table below you can see the amounts that each triplet would have.
As you can see, even though Larry invested less money than his brothers, his savings are significantly higher. More than two-thirds of its final investment value consists of investment returns. This shows the value of an investment over a long period of time.
His brother Curly, who invested more money for half the period, received much less return – R 502,000 compared to R 868,000.
Now consider Susan, who invested for 25 years but, unlike her brother Curly, began investing at the same time as Larry but stopped making deposits after 25 years and left the money in the investment for another 15 years. You can find the result in the second table below.
As you can see, although her investment was worth more than her brother’s, even though she invested half of Curly. This underscores the value of compound interest (and why you should never cash your pension if you change jobs). DM168
This story first appeared in our weekly newspaper, Daily Maverick 168, which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest specialist dealer, please click on here.